Creditworthiness

What it means

Creditworthiness is a lender’s view of the ability and the willingness to repay. No single number sets it: it is built from the filed accounts, account turnover, payment discipline, leverage and collateral.

It is not the same thing as profit. A profitable company with no cash is less creditworthy than one with a smaller profit and steady cash flow, because instalments are paid out of money; liquidity decides.

Creditworthiness and a rating are not the same thing. A rating is the output of a specific model, a rating agency or the bank’s internal system, and it comes as a grade. Creditworthiness is wider: it also covers a judgement on the people running the firm, the industry and the purpose the company wants the loan for. Two banks can therefore assess the same company differently.

How it works in practice

The bank pulls the accounts from the register of financial statements and the payment history from the credit register. Arrears are confirmed by the Financial Administration, the Social Insurance Agency and the health insurers.

File late and you are judged on stale data. After signing, creditworthiness keeps being watched: the loan carries covenants tied to ratios from the statements, and a breach lets the bank raise the margin or call the loan early.

Before a loan application we go through the statements with the client the way a bank will: which items reduce equity, whether receivables from shareholders are explained and whether the notes to the financial statements contain what the bank looks for. Figures explained clearly often help more than haggling over the margin.

What to watch out for

Years of squeezing the tax base down come back at the first sizeable investment. The bank reads the same statements as the tax office, so minimal profit and thin equity mean a lower limit and a higher margin; the extra interest exceeds the tax saved.

Small arrears the company does not know about also damage creditworthiness, such as a health insurance shortfall after the annual reconciliation or an unpaid penalty on the taxpayer’s tax account. The certificate of no arrears is then refused and the loan is delayed by weeks. It pays to check the accounts well before applying.