Credit Worthiness of the Applicant?

What sources of information are available to judge the creditworthiness of the applicant?

An individual or firm is requesting credit. What sources of information are available to judge the credit worthiness of the applicant? Sources that can be utilised are financing statements, bank references, and credit bureaus.
Financial Statements: A vital source of information is the applicant’s financial statements. An applicant who is in a financially sound position would have no hesitation in making available his or her financial statements. Interim reports, if available, are more desirable than annual reports.Audited and CPA certified reports are preferred to unaudited reports. The financial statements are useful for calculating various liquidity, leverage, efficiency, and profitability ratios that may be used in evaluating credit risk. If the firm is using a credit scoring model  or if the applicant is requesting a large amount of credit, financial statements are essential.                                                                                                                                                                                 Bank references – these may not give a lot of information but they tend to use a series of standardised replies, and experience of these will indicate the relative credit grading of the customer in question;
Credit Bureaus: Credit bureaus specialise in consolidating the experiences of other firms with the applicant. Credit bureaus compile a history of the applicant’s credit payment performance as reported by the credit-granted firms. Financial information on
a credit applicant may be obtained by credit bureau member firms who agree to provide credit bureaus with information on their clients.
In addition to these information sources, a firm may try to compile its own information. It may have its sales personnel prepare a report on the credit applicant.Alternatively, if the credit request is large enough, it may send a credit department employee to visit personally with the credit applicant and garner as much financial information as possible. Reports published in trade journals or the financial press dealing either with the
customer company or with the type of business in which it is engaged.

Click here for government certification in Accounting, Banking & Finance