What does creditworthy mean?
The term creditworthy is mainly applied to businesses. A company is creditworthy when it is able to (and, of course, does) pay all incoming bills neatly on time. This is an important signal to the outside world as to whether or not it is wise to do business with the company in question.
Even as an individual, you may or may not be creditworthy. For example, it looks at the loans a person has taken out in the past and to what extent he or she was able to repay them properly. Such loans create what is known as a BKR registration.
If you fall behind on payments, such a registration becomes a negative BKR registration. Future loan providers can see this and will be less inclined to grant you a (new) loan. Your creditworthiness is affected.
Even countries are more or less creditworthy. Again, it is a sign to banks how risky it is to lend money to the country in question.
Why knowing how creditworthy you are is important
For lenders, the creditworthiness of an individual or business is an important signal of how "safe" it is to lend money to you. How creditworthy you are therefore plays an important role in how much of a loan you can get and on what terms.
As a company, understanding its own creditworthiness is therefore of great importance in terms of future growth opportunities and possibilities. This is because it gives the company insight into how likely it is that a loan can be obtained for investments that need to be made.
As a private individual, creditworthiness comes into play especially when taking out a mortgage. Outstanding debts or arrears on previous loans affect your creditworthiness and thus the amount of the mortgage and the interest rate payable.
Knowing how creditworthy your customers are
It may also be wise - as a business owner - to check how creditworthy potential new customers or buyers are. After all, as described earlier in this article, a company's creditworthiness involves, among other things, whether bills are paid neatly on time.
So a reduced credit rating can be a sign to be cautious with this company as a new customer or buyer. By checking for this in advance, you reduce the risk of dealing with defaulters and outstanding invoices.
How does creditworthiness come about?
As mentioned, a company, individual or country is creditworthy when bills can and are paid on time. What matters is the financial health of the party in question.
For individuals, creditworthiness is established based on past loan commitments, the payment history thereon and active payment obligations. Examples include monthly mortgage payments, repayments on student debt, payments for a private lease contract or the BKR registrations discussed above.
For example, a company's working capital and equity are also considered. Many assessors also work with what is called a payment score: a scale from 1 to 10 that indicates how adequately a company meets its payment obligations.
