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Creditworthiness: Which Factors Do Lenders Consider, Exactly?

By Roy Rasmussen Reviewed By Mike Lucas
By Roy Rasmussen
By Roy Rasmussen Reviewed By Mike Lucas

How do lenders determine creditworthiness when evaluating loan applications? Learn which factors impact the approval process. 

We’ll start by defining what it means to be creditworthy from a lender’s perspective. Then we’ll review which factors lenders consider when evaluating creditworthiness. Finally, we’ll share some tips on how to improve your creditworthiness and your ability to obtain financing.

What Is Creditworthiness?

Creditworthiness refers to how lenders perceive the likelihood that you’ll repay what you borrow if they decide to extend financing to you. A creditworthy borrower is considered to be likely to repay what is owed. In contrast, a borrower deemed unlikely to repay the amount owed is considered a credit risk.

Lenders evaluate creditworthiness to protect themselves from the risk of losing money if a borrower defaults on a debt obligation. Financial providers stay in business by only lending money when the odds favor them being repaid with interest. This enables them to stay profitable.

Lenders use scoring systems to measure creditworthiness. For example, the credit score system used by data analytics provider FICO is widely used by lenders as a measure of creditworthiness. FICO and other providers also offer business credit score systems to lenders. In addition to such third-party credit scoring systems, many lenders have internal criteria for measuring creditworthiness.

A pair of hands hold a document labeled “Loan Application.” On one side there is a hand with thumbs up and on the other side there is another hand with thumbs down.

What Will Your Creditworthiness Be Based on When Applying for a Business Loan?

Lenders to businesses may use a number of factors to evaluate the creditworthiness of the borrower. These can include:

  • Personal credit score
  • Business credit score
  • Time in business
  • Revenue
  • Financial statements
  • Collateral
  • Type of loan
  • Purpose of loan funds

Different lenders place varying weight on different factors depending on what type of loan is involved. Let’s look at each of these variables and how they can enter into evaluating creditworthiness.

Personal Credit Score

Your personal credit score is tracked by providers such as FICO based on information submitted by creditors such as banks and credit card providers. Factors that enter into your personal credit score include how:

  • Consistently you pay bills on time, which tells lenders how responsible you are at managing debt
  • High your account balances are compared to your credit limits (credit utilization), which reflects how high your monthly debt obligations are and whether you can afford to take on additional debt
  • Many different types of financing you have used (such as credit cards, bank loans, car payments and mortgage payments), which indicates your experience handling different types of debt
  • Frequently you apply for new credit, which can reflect your financial stability
  • Long you have had accounts such as credit card accounts open, which reflects your long-term financial stability

Your personal credit score can carry more weight in certain situations. For example, if you’re a new business owner without a strong business credit history, lenders may rely more on your personal credit.

Business Credit Score

A business credit score is calculated using considerations similar to personal credit. Factors include:

  • History of on-time payments to creditors, suppliers and contractors
  • Amount of debt
  • Length of credit history

Business credit scoring systems adjust these considerations based on industry type and company size.

Time in Business

Lenders consider the number of years you’ve been in business a reflection of your company’s financial stability. Many lenders have a minimum requirement for time in business. 

Some types of financing may require a longer time in business than others.

Revenue

Your revenue indicates how much money you have available to repay what you owe. Lenders to businesses typically request information about how much revenue your company earns per month or per year. 

For some loans, particularly larger loans or Small Business Administration (SBA) loans, lenders may require documentation to verify your revenue, such as bank statements or tax returns.

Financial Statements

Lenders consider your revenue in the context of your total financial picture. In order for you to afford a loan, your revenue needs to be sufficient to offset your monthly expense obligations plus the added expense of your loan payments. 

The relationship between your income and expenses can be measured through metrics such as your debt-to-income ratio. To evaluate this, lenders may wish to see financial statements, such as your profit-and-loss statement, balance sheet and cash-flow statement.

Collateral

For some loans, lenders may want to know if you have collateral available to put up. Lenders may ask for collateral if you have a weak credit history or if you’re asking for a large amount of money. In other cases, certain types of loans inherently require collateral. 

For example, invoice financing uses your unpaid invoices as collateral, while merchant cash advances use your projected sales.

Type of Loan

Which criteria lenders use to evaluate creditworthiness may depend on what type of loan you’re requesting. 

For instance, forms of financing that require collateral such as invoice factoring may not place as much emphasis on credit score, since your collateral serves to finance the loan in event of default.

Purpose of Loan Funds

Lenders may consider the purpose of your loan when evaluating creditworthiness. 

For example, if your business is thriving and you’re seeking a loan to expand your operations, a lender may perceive you as more creditworthy than a company that is seeking a refinancing loan because it’s struggling to keep up with existing debt obligations.

Lender Criteria for Calculating Credit Limit to Business Customers

Some of the factors lenders use to evaluate creditworthiness also impact lender decisions about setting or increasing your credit limit. 

Your revenue and debt-to-income ratio help lenders evaluate how much you can afford to repay each month, enabling them to set your credit limit proportionately. Your history of repaying debt on time makes lenders feel more confident about increasing the amount they lend you.

Ways to improve creditworthiness include paying bills on time, using 30% or less of your total credit limit and diversifying your borrowing.

How Can You Improve Your Creditworthiness?

You can take a number of steps to improve how lenders perceive your creditworthiness:

  • Pay all bills on time, including personal bills as well as bills for business creditors, suppliers and contractors
  • Restrict how much of your credit lines you utilize to 30% or less of your total limit
  • Diversify your borrowing to include multiple types of credit, such as credit cards, installment loans and mortgages
  • Avoid submitting an excessive number of credit applications over a short period of time, which can make you look desperate for money
  • Keep accounts open even if you have zero balance, which allows your accounts to age and builds the length of your credit history
  • Check with business credit score provider Dun & Bradstreet if your business has a DUNS number, and if not, apply for one, which will help create a credit history for your company
  • Monitor your personal and business credit reports to track your credit score
  • Dispute inaccurate items you notice on your credit reports and report any signs of identity theft

Taking these steps can help you improve your credit score and increase your creditworthiness in the eyes of potential lenders.

Do you need a loan for your small business?

Optimize Your Creditworthiness to Improve Your Financing

Creditworthiness is a lender’s perception of how likely you are to repay a debt as measured by a scoring system. Factors that enter a lender’s evaluation of creditworthiness may include personal and business credit score, time in business, revenue, financial statements, collateral, type of loan and purpose of loan funds.

To improve your creditworthiness, you can take a number of steps. Paying your bills on time, limiting credit utilization, diversifying your borrowing, avoiding excessive credit applications and letting accounts age will improve your credit score. Applying for a DUNS number will help establish your business credit. Monitoring your credit report will help you track your improvements and allow you to dispute inaccurate items. 

Follow these steps to optimize your creditworthiness and improve your ability to obtain financing.

 Fast Capital 360 works with borrowers to help find lenders who are willing to extend you credit based on your current creditworthiness. Take a few minutes to fill out our free, no-obligation prequalifying application and see your loan options.

Roy Rasmussen Contributing Writer for Fast Capital 360
Roy is a respected, published author on topics including business coaching, small business management and business automation as well as an expert business plan writer and strategist.
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