Establishing your creditworthiness

Those who are familiar with finances know too well how crucial cash flow is, especially to business enterprises. One way to manage it is to avail of credit. However, whether you are an established entrepreneur planning to expand your business or a budding businessperson starting your own, it is important that you establish your creditworthiness.

Creditworthiness is the ability of a borrower to pay his loan. To assess one’s creditworthiness, banks or lenders usually look at two things: one is the borrower’s existing and past loan obligations, particularly at how he/she serviced or paid his/her loans; and the other is his present and past dealings with his/her suppliers.

Building up a good credit rating starts with having a degree of certainty and/or regularity of income. Your business’ track record of profitability (at least in the past three years) is, therefore, important. Expect a bank to look at your financial statements when evaluating your application for a loan. This is especially true if you are a first-time borrower.

In addition to your financial statements, the bank will check your dealings with banks and other lending institutions and with your suppliers. If you have been in business for a long time, the reputation of your company would be vital.

In evaluating a prospective borrower’s creditworthiness, the lending institution makes an assessment of both "capacity to pay" and "willingness to pay." It should be a balance of both, for what use is your ability or capacity to pay if you often incur past due? What counts most in establishing creditworthiness is character.

Note that once you have established your creditworthiness, you can borrow again for other purposes like for working capital or for business expansion.

Now, assuming that you pass the test and you have been rated as creditworthy (and have been granted the loan you need), it is important that you live up to the rating. Just like any loan, you must ensure that you use the proceeds only for the sole purpose that you borrowed it for. In other words, you must not divert the loan, say, to buy a new car or to build a vacation house because you would then not be able to pay back the loan. If this happens, there goes your rating as creditworthy.

It is essential that you not only establish your creditworthiness; you should also maintain it at all times. Remember that your reputation precedes your name. It is, therefore, important to be creditworthy at all times.

(Jonathan G. Chavez is an assistant vice-president and head of the specialized lending unit of Asia United Bank.)