Jun 10, 2025
A steady cash flow is the cornerstone of running a successful business. Surprisingly however, problems with cash flow are the main cause of the failure in many businesses, in particular SMBs.A survey undertaken by QuickBooks showed that up to 60% of small business owners have suffered cash flow problems since the 2020 pandemic.
In order to prevent or minimise these types of cash generated issues small and medium sized business should ensure they have a robust credit check policy before engaging new customers.
WHAT IS CREDITWORTHINESS
In a nutshell, creditworthiness is an assessment of a company's financial reliability to make sure that any debts can be repaid in full and on time. Completing a credit worthiness check is essential when considering whether or not to offer lines of credit to potential new customers.
B2B creditworthiness depends on numerous factors. The financial stability of a company is a key indicator, this can be assessed by looking at its revenue streams and the consistency of this income. Payment history is another important factor; are payments made on time? Late or missed payments can have a negative impact on a company's deemed creditworthiness.
The credit score of a business, which is a numerical representation of how creditworthy a company is should also be taken into account. Most lenders and suppliers rely on a credit score in order to make a quick assessment on whether or not to offer credit terms to a potential customer.
As the title suggests, corporate creditworthiness relates to the financial reliability of a business with specific reference to the repayment and fulfilment of its financial obligations.
When assessing corporate creditworthiness there are different metrics which can be used. One of these is a business credit score, which provides a measure of a corporation's financial stability, and an indication of how reliable they will be in fulfilling any financial commitments they may have. A corporate credit score can range from 1-100, the higher the score the more creditworthy the company.
There are many criteria which can be used to assess how creditworthy a potential customer is likely to be. One of the most well known methods is to apply the Five C’of credit. By understanding the five C’s - character capacity ,capital, collateral and conditions it can help you make an informed decision on how reliable a customer will be when it comes to repaying the credit debt.
So let’s take a look at each one individually.
1.CHARACTER
This evaluates how reliable and trustworthy a customer will be. In order to determine the character of a customer, it is necessary to examine their credibility and background. A key indicator in this assessment is to look at their existing credit history. Data including their credit report and credit score, along with how long a business has been trading, any bankruptcies whether payments are made promptly and full, will all be included. A credit score can vary from 300-850, the higher the score the stronger the creditworthiness of the company.
2. CAPACITY
Capacity is the capability of the customer to repay debt. To analyse the capacity to repay credit you must consider cash flow, business debt and repayment history. The method of measurement is the Debt service coverage ratio DSCR and Debt to income ratio DTI. A healthy figure for this is a DSCR of 1.25% or greater and a DTI of 36% or lower, which indicates a good capacity for payment.
3.CAPITAL
Capital consists of total funds and assets (financial and non-financial) owned by a company Prior to offering credit to new customers it is prudent to consider the worth of the business with regards to their level of investment in fixed assets alongside bank records and financial statements to gain an idea of their overall capital. If within this information a trend towards strong capital growth is seen then the customer can be considered low risk, and hence possibly offered a higher credit limit.
4. COLLATERAL
This is the level of assets a customer can offer as a form of surety to any credit. It can consist of fixed assets, inventories, corporate bonds or property. It is normally a requirement from companies that some form of collateral is offered in return for credit. This is especially the case when dealing with high risk customers in order to limit the risk of non payment of a debt.
5. CONDITIONS
These are terms specific to individual companies that are applied when offering credit. They are influenced by policy, economic conditions and any regulatory requirements in the customer's operational region. They can be many and varied, depending upon the geographical location, industry, currency fluctuations, and political situation applicable to the company involved. They are applied to the terms of credit when it is offered. If situated in a stable geographical area a company would be considered more creditworthy and lower risk.
Before a company offers credit it is imperative that they assess i9f a customer has the ability to manage and repay outstanding debt.
Listed below are six steps you can take to determine whether or not a customer is creditworthy.
Making sure you collect all relevant information about a customer is the first thing you should do when assessing whether they are credit worthy. Prior to offering credit it is vital that you get your customers to complete a business credit application. This asks clients to provide general business information such as bank references and credit history. By doing this client data can be consolidated, speeding up the onboarding process.
Taking a close look at a company's credit report is useful when evaluating how credit worthy a customer is. Contained in a credit report is information about the company and its financials which allows you to generate a credit score. It highlights a company's ability to make repayments by looking at its history along with public records. You can purchase a company's credit report by using agencies such as Experian, D&B, and Equifax.
Financial reports provided by a company can give you a good insight into its cash position. Included in a financial report are cash flow statements, incomes statements along with the companies balance sheet. It is important that you make a thorough examination of a new customer's financial situation by carrying out a review of public financial statements.
Examining the debt to income ratio of a customer in another method you can use when evaluating whether or not a customer is a good credit risk. This will give you an indication of what percentage of their monthly income is used to repay debt. This can be calculated by dividing a company's monthly debt repayments by its gross monthly income. Having a low DTI ratio shows that a client has a healthy balance between debt and income, while having a high DTI ratio indicates that a client has more obligations than income.
It is important that you make use of all available sources when assessing whether or not a customer is a credit risk. When undertaking an investigation you should examine:
Customer background and history
Credit policies
Accounts receivable aging report
Economic and political climate analysis
Future business probability
Taking all these factors into account will help you make better decisions around customer authentication.
Once you have gathered all relevant information about a new client you should undertake a complete account analysis. Take an in depth look at trade references, financial statements while applying a credit analysis which will help predict how probable a default is. Some of the key financial metrics you should consider when carrying out a credit analysis include profitability ratio, leverage ratio and liquidity ratio.
When onboarding new clients, companies typically conduct credit checks through credit reporting agencies. However, these agencies may sometimes lack complete or accurate data. This does not necessarily mean the client is not creditworthy—it may simply indicate that the company has not provided enough information for the agency to generate a comprehensive credit report.
One way to address this issue is by requesting active trade references from the client. A trade reference is a detailed account of the client’s payment history with their vendors and suppliers, offering valuable insights into their financial reliability. Reaching out to these vendors and suppliers can provide additional details about the client’s creditworthiness. Here are some key questions you may want to ask:
What is the largest amount of credit used
How much do they currently owe
What is the current total past due
What are the credit terms
What is the frequency of late payments
What is the maximum credit limit extended
Mid-sized businesses frequently depend on their customers to meet working capital needs, making it essential to monitor their clients' financial stability. This step-by-step guide offers practical tips to help you optimise working capital and reduce risk.
To enhance your credit portfolio and simplify customer onboarding, consider replacing manual, paper-based credit management processes with digital solutions. Tools like the RadiusOne Credit Risk Application can improve efficiency by automating key tasks. Our advanced credit scoring feature, built on industry-specific best practices, enables you to assess risk more accurately and anticipate customer payment behavior.
If you want to measure a company's credit risk you need to evaluate its financial health, credit history and industry trends. When assessing whether a client is likely to default you need to analyse credit rating, debt-to-equity ratio, and payment history.
You can determine credit risk by looking at the credit history and financial health of a company. Factors such as these assess a company's ability to meet obligations while giving insights to lenders and investors.
Creditworthiness can be determined by evaluating the five Cs of credit: character, capacity, capital, collateral, and conditions. These factors can provide lenders with a comprehensive understanding of an individual's or company's creditworthiness, which in turn allows them to make informed lending decisions.
