What is creditworthiness?

Creditworthiness is used to assess the ability of a borrower to meet its financial obligations. It implies confidence in a party’s ability to repay its debts received from financial institutions. Thus, if a lender is confident that the borrower will honour the debt obligation in a timely fashion, the borrower is deemed creditworthy.

Why is creditworthiness important?

Creditworthiness is important because it allows potential creditors to determine the credit risk they face while lending money to a borrower. It allows them to make an informed decision on whether to grant the loan and on what terms. This means that if a borrower has a good credit rating, they will have easier and cheaper access to loans. On the other hand, if they have a poor credit rating, it may be harder to get a loan and the terms may be more unfavourable. It also increases the likelihood of default.

How to improve creditworthiness?

It is necessary to understand its own financial capacity before taking a loan. If the income or assets are not enough to support borrowing, then it is better to delay it. One of the most essential things that a business owner must do is to track their credit scores regularly. This is to ensure that if there is any mistake, that can be rectified quickly. Repaying your loan EMIs on time is a crucial factor in improving credit score, overdue payments negatively impact your credit score and which in turn is detrimental while applying for any loan.

Factors that determine creditworthiness of borrowers:
  • Credit History:

    The credit history of borrowers is the basic factor which determines whether they have an ability to repay debt on time and in full.

  • Employemnt  history:

    The income and employment history of the borrower also influence the regularity with which monthly instalments are paid..

  • Debt to Equity ratio:

    Borrowers with low Debt-Equity ratio are considered more eligible for credit.

  • Collateral:

    Collateral refers to assets pledged by a borrower to secure a loan, which can help a lender mitigate risk and assess the borrower’s creditworthiness.

Therefore, the borrowers who meet the eligibility criteria are considered more likely to be approved for loan. To maintain good creditworthiness, borrowers should pay their bills on time, keep their credit card balances low, and monitor their credit report regularly. They should also maintain a stable income and employment history and have sufficient collateral to secure their loans. By following these practices, individuals and businesses can build a strong credit history and ensure their financial stability.

About Red Fort Capital

Red Fort Capital offers quick business loans for machinery to assist businesses in investing in time-sensitive opportunities. In general, lenders have a difficult time estimating the conversion of an equipment investment into a net positive cash flow. Furthermore, business credit must be closely monitored. As a result, it takes them more than a month to process a loan for machinery. Whereas Red Fort Capital NBFC funds machinery and equipment loans within 7 days with flexible repayment terms and conditions. It also provides 100% financing for equipment and machinery by taking additional collateral.