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What is creditworthiness?
Creditworthiness is a value that measures the capacity of an individual or a company to refund its debts, in the short or long term, to banks, suppliers and/or partners.
Conversely, insolvency corresponds to the inability of an individual or a company to refund its debts, in the short or long term, to banks, suppliers or and/partners.
A company is creditworthy if it has enough assets to cover its liabilities. Otherwise, it will be insolvent. Creditworthiness is generally used to assess the risk of granting a loan or a credit to a company.
Why check the creditworthiness of your customers?
Every time your company sends an invoice to a customer, there is a risk that it will not be paid. This can have a negative effect on your cashflow and the profitability of your business. One big unpaid invoice can cause your company's growth to be in jeopardy or even bankruptcy.
Unfortunately, even a reliable business partner you have been doing business with for years can also run into financial trouble. And what do you really know about your new customers? Are they as financially stable as they seem? It is therefore essential to check the creditworthiness of all of your customers. At the end of the day, you want customers who pay your invoices.
How to get sure a customer is creditworthy?
You are never safe from a default of payment or the bankruptcy of one of your customers. Even a customer who has worked with you for more than 20 years and who has always paid your invoices on time could be unable to pay your bills on tomorrow. So don't be fooled by appearances.
This starts with collect the right information about your customers. Then you need to be able to detect the signals that things are likely to go wrong. You can use information from the Chamber of Commerce. And the internet can also help you estimate how a company is doing financially.
You can also use external parties to check creditworthiness, such as a trade information bureau or a trade credit insurer like Allianz Trade. Our extensive information database can help you do just that. We have financial information on more than 83 million companies worldwide. By using this information, you can decide with confidence on what terms you want to do business with them.
The NBB as source of information about creditworthiness
The National Bank of Belgium (NBB) has many information that can help you to check the creditworthiness of a customer.
The National Bank plays an important role in the collection, compilation, analysis and distribution of economic and financial information. It collects macro-economic data on the Belgian economy and micro-economic data on individual businesses and economic agents.
It centralizes the balance sheets of all Belgian companies and collects information on the credits of companies, self-employed and individuals.
The reports are accessible free of charge via the platform ‘Consult’: https://consult.cbso.nbb.be/
For the Grand Duchy of Luxembourg, you can contact the Luxembourg Business Registers (LBR) : https://www.lbr.lu/
How to calculate creditworthiness
There are some key financial KPIs that you should look at regularly to monitor your clients' financial performance:
- Revenue/sales: this KPI should be positive, but bear in mind the need for investment in case of very rapid growth
- Net profit margin: the higher, the better
- Leverage (net debt/EBITDA): it should usually be lower than 3 or 4, but this can be different depending on the sector
- Liquidity: available cash, provides information on your client's ability to meet short-term financial obligations.
- Debt-to-equity ratios: you analyse this kpi on the long term
- Working capital requirement (WCR): difference between short-term assets and short-term liabilities
Who can check the creditworthiness?
Financial analysis can be quite complicated these days. It takes more than just numbers! A risk expert who understands not only the numbers, but also your business, your sector and the economy, can help you see this broader perspective and create a solid basis for decisions. Banks examine the creditworthiness of companies that apply for loans. There are professional rating agencies that do nothing but assess the creditworthiness of companies and countries. The best-known credit rating agencies are: Fitch Ratings, Moody's and Standard & Poor's.
Credit insurers like us can also help you. We have huge databases with information on more than 80 million companies worldwide. And we offer trade credit insurance. Trade credit insurance includes the required risk expertise and protects your company against the risks of payment default and insolvency of your business customers:
Credit insurers like us can also help you. We have huge databases with information on more than 80 million companies worldwide. And we offer trade credit insurance. Trade credit insurance includes the required risk expertise and protects your company against the risks of payment default and insolvency of your business customers:
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We regularly ask our customers their opinion about our services. For this purpose, we work together with Ekomi. This is an independent company that guarantees the transparency and authenticity of the reviews.
Checking your customers’ creditworthiness not only means knowing whether you will be paid, but also developing your business with trusted partners and limiting the risk of non-payment. When the creditworthiness of one of your customers is impaired, you will need to review your payment's terms and conditions, possibly request additional guarantees or partial/full advanced payment upon order placement. If your customer is solvent, you can give them more flexibility and do more business with them. You can also check the creditworthiness of new customers which will allow you to develop new markets while limiting risks.
, 24/10/2024
, 08/10/2024