When it comes time to access credit or engage with new suppliers and trading partners, your company credit history can be as important as your reputation in the industry. If you’re unaware of your business’s creditworthiness, you may struggle to gain favourable financing terms or establish a foundation of trust with stakeholders. 

Assessing the creditworthiness of a business is crucial for both the business owner and potential lenders or investors. A strong company credit profile indicates your level of risk as a debtor, showcasing to other entities your likelihood of meeting your payment obligations.  

Whether you’re receiving frequent rejections for credit products and/or business proposals, or you’re curious about your company’s credit information, now is the time to do so. Here’s a step-by-step guide for business owners to assess their business’s creditworthiness and run a credit check for their company. 

What is my company credit score? A guide to assessing your business’s creditworthiness:

1. Understand Creditworthiness

The first step is to familiarise yourself with the factors contributing to creditworthiness. By understanding the underlying factors that shape a company’s credit score, you will comprehend how to maintain or improve your score (if needed).   

• Financial stability – Take stock of business financial statements, balance sheets, and cash flow patterns to assess the consistency and resilience of revenue streams and overall financial performance. This step is part of a bank or lender’s credit application process, so you should assess the stability of a business with your own eyes.   
  
• Payment history – Delve into the archives of your business’s financial transactions to examine the track record of payments. Timely and consistent payments showcase reliability and responsibility. For example, if you frequently pay your bills and other invoices late, ask yourself: would you lend your business money?  
  
• Reputation – Beyond the numbers, consider evaluating how your business is perceived in the industry and among clients. A positive reputation signifies trustworthiness and reliability.  

 2. Gather Financial Statements

Much like a bank or lender will do if you apply for a line of credit, gather all your essential financial documents and go through them with a fine-tooth comb, including:  

• The balance sheet for a snapshot of assets, liabilities, and equity. A healthy balance sheet indicates strong financial management and stability. 
• The income statement assesses profitability over a specific period. Look for consistent profitability and positive trends.  
• The cash flow statement for insights into operational liquidity and efficiency. Assess the business’s ability to generate cash and meet its short-term and long-term obligations. Positive cash flow is crucial for creditworthiness. 

These statements serve as critical tools for providing a comprehensive view of your business’s financial health. For example, if your business has healthy cash flow and low liabilities, this may indicate a higher likelihood of a positive company credit score. By casting a careful eye over them, you will gain knowledge of the potential creditworthiness of the business.

3. Assess Debt Levels

Be sure to review the amount of debt your business carries. While some debts can be considered “good”, such as a mortgage, high debt levels compared to equity can be a red flag for lenders and partner entities.  

Assess the ratio of debt to equity in your company. While the optimal debt-to-equity ratio can vary depending on your industry, a general rule of thumb is to keep it around 1-1.5. Capital-intensive industries, like manufacturing, may have ratios of 2 or higher. 

Finally, consider your business’s capacity to service its debt. Could your current revenue streams and cash flow allow you to cover debt payments comfortably? What if a worst-case scenario occurred and you needed to drain your cash reserves – could you still pay your bills? This is a good opportunity to address any red flags before a potential lender or partner entity sees them. 

4. Evaluate Your Payment History

Paying your suppliers, lenders, and utility providers on time is crucial for building trust and a positive credit image. Meeting payment deadlines consistently showcases a high level of financial responsibility and reliability. On the flip side, if you’re often late with payments or don’t pay at all, it can raise concerns among lenders and negatively affect your overall creditworthiness.  

Late invoice payments exceeding 14 days may also be reported on your company credit history, and can adversely impact your business credit score. Late payments can also result in a higher likelihood of being offered sky-high interest rates on credit products, a reduction in your borrowing capacity, and increased scrutiny by credit providers which makes securing credit even harder. 

5. Monitor Credit Reports

You can obtain a copy of your company credit report from credit reporting agencies, such as CreditorWatch. This is by far one of the simplest ways to assess the creditworthiness of your company, as your credit profile is what lenders and other entities will assess when considering engaging with you.  

CreditorWatch’s company credit reports will outline essential information, such as: 

• Default risk – from A1 to F. 
• Number of credit enquiries. 
• Defaults registered against the company. 
• ATO tax defaults. 
• Court actions. 
• Cross-directorship information. 
• ASIC notices published against the business. 
• Other adverse data. 

This information works to create your business credit score. A good credit score for a business at CreditorWatch would be: 

• A Default Risk score of, or near, A1. 
• A RiskScore of, or near, 850. 
• A Payment Rating of A. 

Regularly assess your company credit report for inaccuracies and address any issues promptly. It’s not uncommon for mistakes to occur, such as businesses with similar names to your own having their credit behaviour recorded on your company credit file. 

6. Examine Industry Comparisons

Another way to assess the creditworthiness of your business is to compare its financial metrics with industry benchmarks to gain insights into its relative performance. Research industry averages for revenue, profitability and liquidity to understand how your business is viewed contextually against your competitors. If there are significant differences between your business and the industry averages, you may want to work on avenues of improvement. 

7. Assess Market Reputation

While a bank or lender should formally assess your financial health when determining your creditworthiness, other businesses will take word-of-mouth as gospel. A positive reputation within your industry also impacts your ‘creditworthiness’ for engaging with new trading partners and suppliers.   

Look to areas like customer reviews and your standing in the industry to gauge your market reputation. You could reach out to trusted business partners or mentors within your industry for their honest feedback. Positive reviews can bolster your reputation and showcase your business’s reliability through customer satisfaction. Awards, recognitions and public industry partnerships also contribute to your overall market reputation. 

8. Review Legal and Regulatory Compliance

Unfortunately, legal issues can negatively impact the creditworthiness and reputation of a company. Ensure your business complies with relevant laws and regulations at local, state, and federal levels, such as a construction company obtaining the necessary licences and permits to operate.

9. Evaluate Management and Operations

Another factor that contributes to a business’s creditworthiness is the competence of your management team and the efficiency of your business operations.  

Competent leadership can directly impact the business’s reputation and creditworthiness.  Evaluate the skills, experience, and track record of your management team as strong leadership inspires confidence among stakeholders and positively influences creditworthiness.   

Also, assess the effectiveness of your business operations. Streamlined operations, efficient resource utilisation, and a focus on productivity indicate a well-managed and resilient business. Your operations will trickle down into your financial performance and, in turn, impact your business creditworthiness. 

10. Consider Future Prospects

If you’re assessing your creditworthiness for an upcoming credit application, keep in mind that lenders and investors will want assurance that your business has a sustainable trajectory. Outline strategic initiatives, market expansion plans, and innovations for a clear vision for the future. This type of forward-thinking is crucial to assuring stakeholders that your business is well-positioned for long-term success and that you can responsibly service debt. 

11. Communicate with Creditors

Transparency is invaluable in business relationships. Maintain open communication with creditors and assess any concerns proactively to build trust and business reputation. This communication can look like: 

• Openly sharing relevant information and potential challenges with creditors that may impact your ability to make repayments.  
• Providing regular updates on your business’s financial performance and keeping creditors informed about any new aspects of your operations. 
• Being forthcoming about changes in your business structure or potential hurdles demonstrates a commitment to honesty and responsibility. 

The bottom line 

As important as the reputation of a business is, its creditworthiness speaks volumes about its financial reliability. If a business owner is unfamiliar with their company’s creditworthiness, the consequences can be severe, including struggling to secure favourable financing terms or building new business relationships. 

There is more to your company’s creditworthiness than what may be on a company credit report. However, a credit report is still the gold standard for assessing Australian companies and is your best place to start. If you’re ready to view your company credit report, or for more information on the comprehensive suite of credit management tools from CreditorWatch, contact our team today.