Article Risk & Credit

Creditworthiness: Are you worthy of receiving a credit?

The term "creditworthiness" refers to the ability and willingness to repay debts. As financial manager of an SME, you must be familiar with the creditworthiness of your business partners and have a positive influence on your own creditworthiness. In this article, you will learn how creditworthiness comes about and how you can actively influence it.

Every time you supply a customer on account, you give a credit - the so-called supplier credit. Because while the customer already has the goods at disposal, they have not yet been paid for.

Perhaps you have already experienced situations in which your claim was not paid. You have to invest a lot of time and energy to get your money - and you are not sure if you will end up empty-handed. You can use a credit check to prevent payment delays and bad debt losses. For you, this means less need for justification towards superiors and owners as well as less annoyance and costly processes with unreliable customers.

An early credit assessment means: less effort and hassle for financial managers.

What does a credit check include?

The basis of every credit check is data. When you evaluate a new customer, you may have different requirements than when you check an existing customer, for whom you have already formed your own impression on the basis of previous transactions.

This is why SMEs often rely more heavily on external data for checking new customers. Existing customers, on the other hand, should be monitored on an ongoing basis in order to identify changes relevant to creditworthiness at an early stage.

The information used to assess creditworthiness comes from numerous sources. SMEs can find internal data in their own accounting or from customer care information. Further information can be obtained from publicly accessible sources such as the internet, media reports or official publications.

When you include a credit bureau, you can select summarised reports with different levels of information that contain the following:

  • Credit rating index or traffic light system for quick initial assessment of a customer
  • Payment behaviour and default (how punctually a company pays its invoices)
  • Negative characteristics (for example, prosecutions)
  • Company history
  • Business subject, industry
  • Subsidiaries, branch offices and stores
  • Participations and group affiliations
  • Bank details
  • Management information
  • If available, business figures and annual financial statements

Basic rule: The higher the supplier credit, the more detailed the credit check must be.

Credit check: What you do with it

There are signals that clearly mean a “no go”. Several debt collections, massive payment delays and open wage payments reported in the media are all signs that it would be better to supply this customer only against prepayment.

But the situation is not always clear. As CFO, you need a credit policy to safeguard your decision and treat all customers uniformly. It regulates the procedure for setting credit limits and payment terms for your customers. Each individual test must always be seen in a larger context.

As the person responsible for finance, you are not only responsible for assigning the individual credit limits. You must also keep an eye on the overall risks. The sum of all debtors, i.e. the portfolio with its overall structure, its risks and its sales potential, forms the framework within which you make individual decisions.

So determine how many risks you are willing to take. Then assess each case individually.

How does your SME improve its creditworthiness?

As CFO, you need to know the creditworthiness of your customers. But you should also know about your own creditworthiness and actively shape it.

With these three tips, you ensure that your company is perceived as creditworthy.

1 Order a self-disclosure

Companies often rely on the services of so-called credit bureaus to assess the creditworthiness. They collect business-relevant data and pass it on in condensed form to companies that have a legitimate interest. This is for example the case before a contract is signed. In advance more information is needed about the future business partner.

As a company, you have the right to order a so-called self-disclosure. It gives you an overview of the collected data and the resulting creditworthiness of your own company.

With self-disclosure, you know how your creditworthiness presents itself from the customer's point of view.

2 Deliver positive information

When calculating creditworthiness, credit bureaus proceed according to the principle of prudence. If very little information is available, this may result in a lower creditworthiness. You have a positive influence on your creditworthiness if you actively deliver so-called positive information. This includes, for example, clean debt collection statements or information on financial and employee figures.

3 Managing cash flow

Insufficient liquidity leads to payment bottlenecks and delays. If your business partners notice this, your creditworthiness deteriorates and you receive less credit - a vicious circle.

With these three measures, you can improve your cash flows:

  1. Acceleration of payment processing
  2. Protection of payment processing against errors
  3. Avoidance of payment defaults

Also reduce your collection period, the so-called DSO (days sales outstanding). Basically the following applies: The earlier your customers pay, the better. Our 9 tips for faster incoming payments will help you.

Another way to improve liquidity is to increase the DPO (days payables outstanding). But beware, if you strain the patience of your suppliers too much, this in turn has a negative influence on the creditworthiness and thus on the granting of credit.

Have you already been refused a credit? Find out how to better manage your cash flow.

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