Factors To Assess The Creditworthiness Of a Customer

 

The meticulous paperwork that follows after applying for a loan from a bank to successful completion of the formalities makes the lender available for loans. The decision of financial institutions for getting a good real-time credit score and customer's creditworthiness is based on two assessments- the ability to pay and the willingness to pay.

Yet, there are cases when the actions of the client regarding providing goods and services or paying later determine creditworthiness. Through these institutions, managing credit can be done at its best and the financial risk can be lowered. 

How are the real-time credit score and the creditworthiness determined?

The timing of the payments, the due bills and the repayment of loans determine the real-time credit score. This score signifies how deserving a customer is for availing credit and thus, counts for its creditworthiness. There are multiple factors to this, like revenue, payment history, credit score, outstanding liabilities, etc.

Take a look at the 5Cs of creditworthiness

In total there are 5Cs on which the creditworthiness of an individual depends. It also determines its ability for credit risk management. Lets' take a look:

Character

This is based on the dependability and trustworthiness of a customer. For establishing a customer's character, his/her credibility and background play a very important role in data enrichment. In this case, the most important role is played by the credit history that helps in evaluating the customer's character.  This history contains a detailed analysis of the customer's credit report and score and also showcases how long the customer has continued business, been in bankruptcy, made payments on time or not, etc. The credit score must always vary from 300 to 850. The better the score, the better the creditworthiness.

Capacity

The capacity of a customer refers to his/her ability to pay debts on time. The only way to evaluate this capacity is by checking the cash flow statements, the business debt and the payment history. These pointers also help to determine the overall health, overall cash flow and Debt Service Coverage Ratio (DSCR) Debt-to-Income ratio (DTI) of a company.

Capital

The total financial and non-financial funds that are owned by the customer determine the capital. This also helps to understand credit risk management. While the customer extends his hand to other companies, the fixed assets and other instruments play a vital role. The statements presented by this company help get a clear picture of the capital growth, whether the customer is risky or not and a higher credit limit.

Collaterals

These are a part of every industry and are essential for data enrichment. Here, the customer commits a loss of credit in case his/her assets are at risk. This is why the companies require collaterals as an assurance for extending the credit. Especially when the customer has opted for high-risk, the company always asks for collateral which can even go to bad debts.

Conditions

The final 'C' that determines the real-time credit score and creditworthiness is the conditions. These are developed by the company as part of the policies and economic conditions or the regulations for the customer's region of operations. A customer who has a geopolitical environment is sure to be more creditworthy due to its low economic risks. Customers belonging to industry type, currency fluctuations, etc.  have privileged  payment terms and conditions 

The credit score obtained from different data incorporates must-have new factors like financial ability, past non-banking credit and even credit history, non-banking transactions, assets, etc. The ability to grant credit should always be based on the customer's competence to manage and repay the loans on time.