Skip to main content

How may credit worthiness be assessed?

By November 21, 2022No Comments
lady holding a credit card and making a phone call

How can you assess the creditworthiness of a Business

Trade credit or an agreement under which your client can buy goods and services you offer and pay in the future it’s a standard procedure within B2B transactions. It’s a powerful tool to increase sales and boost the growth of your business.

However, suppose you bill customers later after providing services or goods and expose your business to the possibility of late payments or default. In that case, this could disrupt the cash flow, which is your company’s essential lifeblood.

The ability to determine the creditworthiness of a customer before when you grant credit is a suitable method of reducing the risk to your finances. Learn the most effective practices and essential sources to help you comprehend how to determine a customer’s creditworthiness.

To prevent your firm from late or nonpayment on bills, evaluate customers’ creditworthiness before extending credit—six ways to analyze prospective clients’ creditworthiness.

What is creditworthiness, and how Do You Determine It?

The simplest way to define creditworthiness refers to the capacity of your customers to make payments to you. This is why it’s crucial to know how to gauge creditworthiness before extending trade credit. To determine customers’ creditworthiness, you must know their history of paying punctually and the capacity to keep doing so.

This includes their income in addition to outstanding commitments. It is also essential to know the business’s plans and developments within their field, which could impact their ability to make payments.

Utilizing the 5 Cs of credit to conduct an Assessment of Credit

You can assess the likelihood of lending credit and determine credit limits using five variables referred to as “the Five Cs of Creditworthiness.” Although there aren’t any strict guidelines on evaluating these Determining Customer Credibility * March 2021 * for DimeBucks 4 characteristics, considering each will help you conduct a credit evaluation to determine the probability of default and the possibility of financial loss should you decide to extend credit.

These five factors that will help you assess whether a company is credit value of a business are:

  1. Personality: It’s essential to ensure that your trade partner has the experience and credentials that show they are reliable and have a good reputation for solid business practices. To evaluate your partner’s character, it is best to call reference numbers, study the company’s credit history, and then analyze its credibility within the field.
  2. Capacity: You must ensure that the prospect or customer can pay your invoices. Understanding your company’s cash flow status will give this understanding. You must examine your cash flow statements, the ratio of debt to income, and then compare it to historical revenue.
  3. If your invoices are unpaid, your customer may liquidate some assets to pay the outstanding debt. One of the most critical aspects of thorough credit analysis is understanding what assets your customer or trading partner holds, like equipment and accounts receivable.
  4. Capital: Knowing how capitalized your partner is will allow you to assess their capacity to pay for the goods or services you provide. You can request a review of a potential client’s financial statement that is certified by the.
  5. The conditions: Carefully examine the conditions that may impact your trade partners’ business. The political and economic climate in the area that you operate in and the potential threats to or opportunities for the field the company operates in will help to determine whether the company will be able to continue to thrive or if the challenges may indicate an opportunity for late payment.

How do you determine the creditworthiness of a new customer

To safeguard your business from non-payment or late payment on invoices, it’s crucial to use the appropriate tools to verify the creditworthiness of clients before you grant credit. Here are six methods to assess the creditworthiness of prospective customers.

1. Examine a company’s financial health through Big Data

Big data is helping businesses enhance the effectiveness and efficiency of their credit departments and is now supported with tools that drastically cut the time required to complete critical tasks. Trade credit insurance is an excellent illustration of how businesses can quickly collect more information from customers to enhance credit processes.

Utilizing the DimeBucks illustration using DimeBucks as an example, the credit data we provide our customers comes from a range of sources, a few of which are:

  • More than 85 million businesses are tracked in our risk database
  • 1 700 sector-specific credit analysts across the 62 countries of the world plus 30 full-time data researchers
  • A vast range of third-party and proprietary data sources
  • Direct contact with buyers who are monitored to inquire about and review financial statements
  • Real-time past due and claims reports from more than 55,000 customers around the globe
  • Machine learning and artificial intelligence to supplement our experienced analysts

The more extensive insurer’s database, the greater access to vital customer information based upon information from a global collection of clients and analysts. These local experts and clients provide details about payments to customers. The confidential financial information about businesses provides insight into strengths and weaknesses.

2. Examine a Business’ Credit Score by running a Credit Report

To evaluate a buyer’s creditworthiness, check the business credit report. It reveals a company’s ability to pay bills based on its past payment history and public documents. The credit report offers a detailed overview of the company’s financial details, including annual sales, invoice activity, credit limits over a while, legal judgments, collections operations, and a credit score.

A business credit score is an indicator of a business’s financial stability. Typically, the score falls between 1 to 100, with scores of 75 or greater considered exceptional. You can buy a company credit report through Dun & Bradstreet and Experian Business.

It is important to note is essential to remember that credit statements are constructed on data that is provided by the company using a snapshot of time, which isn’t always apparent to the consumer. The users of credit reports need to be aware that the information provided may be more than an entire-year-old and could not reflect the latest changes in the company’s creditworthiness. It is possible to blend credit reports with other credit assessment techniques, including risk data analysis which comes with an insurance policy for a credit insurance policy.

3. Ask for references

When evaluating a company’s creditworthiness, they frequently request references to trade before offering credit to a client. Trade references may include the customer’s bank and businesses or suppliers who have already extended trade credit to the client.

Some good queries to pose to these sources include:

  • What is the length of time the business or supplier has provided credit for the client?
  • The credit or purchase limit that the supplier or company has granted to the customer
  • If the last purchase made by the customer was of a certain amount, and the price;
  • How many times have they been late?

When studying trade and bank references, you must be aware of the potential biases in the selection process. Suppose you ask a prospective client to provide a connection from another supplier, for instance. In that case, they’re most likely to give information about businesses they pay on time and leave out companies they do not.

Gathering this information could take significant time since you depend on receiving prompt responses.

4. Review the Financial Status

Companies who want to deal with you shouldn’t hesitate to disclose financial data, allowing you to determine the capacity to pay for goods or services. To know the state of a company’s finances, it is best to request and read the company’s financial statements that are certified for information about the financial performance of the company.

Reviewing the company’s cash flow statements that reveal the business’s current performance is also recommended.

5. Calculate the company’s Debt-to-Income Ratio.

To calculate the ratio, you need to divide the monthly debt payment of the company by the gross monthly income. The numbers can be found on the financial statement.

The smaller numbers (below 36), the more favorable. However, the best ratios for debt vary between industries. It is essential to know the fundamental ratios.

6. Investigate Regional Trade Risk

In assessing the creditworthiness of clients, it’s essential to examine the risks within the region where your client is. Fluctuations influence country-specific credit risks in exchange rates for currencies and political instability, economic and political instability, the possibility of embargos or trade restrictions, or other problems.

These factors could negatively affect a prospective client’s cash flow and cause trade credit risk. DimeBucks can help. We provide information on country and sector risks to help you make decisions when extending credit. We also use our credit risk grading model to predict credit risk and defaults.

Reduce the risk of not being paid through Trade Credit Insurance

Suppose you protect your accounts receivables by obtaining trading credit insurance from DimeBucks. In that case, You are guaranteed to be paid, regardless of whether you have a client who is in bankruptcy or unable to pay. Additionally, trade credit insurance offered by DimeBucks is accompanied by the benefit of having the assistance you need to make informed choices about the possibility of extending credit to new customers or expanding credit for existing customers.

Luke Pitt