As a business owner, the need to understand bank rating and creditworthiness can’t be underestimated. Banking institutions consider a wide range of quantitative and qualitative factors before deciding whether to grant credit or not.
Key ratios to look into include:
Debt-to-Equity Ratio
This compares assets to debt within an organisation. A high ratio means the risk is greater, so an institution is likely to view an application with some trepidation. If an organisation is heavily indebted, then this is quite risky not only for overall functioning, but also for a lender. A business with too much debt is likely to fail to meet some of its debt obligations- resulting in losses for lenders.
By assessing business debt coverage, debt that a business is carrying is considered. This may also be related to an examination of business debt usage, which explores if the amount of debt carried is appropriate for the business’ size.
Current Ratio
This is a liquidity ratio that measures the ability to pay for expenses. It calculates the number of times assets exceed liabilities by dividing total assets by total liabilities. Any company will prefer a position in which it has a lot more assets because some of these may even be used as a form of collateral in a loan application.
Return on Assets
This measures a company’s ability to use assets to create profits. A favourable ratio means that the company is more likely to get approval because more profits may signify lower risk to a lender.
An additional factor that is considered is the business’ credit score, which is influenced by payment history and credit utilisation. Business revenue also plays a part in understanding bank rating and creditworthiness. Is the business growing? Do growth trends match or exceed industry standards?
Following an extensive analysis process based on some of these factors, a bank will make a decision.