After two years of high single-digit growth, corporate profits were down sharply in 2024, according to the U.S. Bureau of Economic Analysis (BEA). While multiple surveys of business owners say they expect revenue growth over the next 12 months, performance really is on a case-by-case basis.
Among small businesses, 65% report being profitable. But, determining whether or not a potential customer falls into that 65% is not always easy. Yet, knowing their business creditworthiness is critical for making decisions about extending credit and protecting your cash flow.
With that in mind, let’s look at how to determine the creditworthiness of a company and the key indicators you should look for to evaluate its financial health.
How to Determine the Creditworthiness of a Company—5 Key Indicators
Businesses today need to be more strategic about extending credit to customers. They need to go beyond asking for trade references, which can be selective and hide potential financial distress.
Here are five key indicators that will help you determine the financial health of customers so you can make better credit decisions.
Credit Rating
A business credit rating is a simple way to check on business creditworthiness. When you pull a business credit report from one of the credit reporting agencies, you get a rating of how a potential customer handles their credit.
There are three main reporting agencies: Equifax, Experian, and Dun & Bradstreet. Each uses different metrics to analyze financial history and health and the likelihood you will get paid on time. Scoring models include data such as:
- Payment history to creditors and suppliers
- Credit utilization
- Trade lines
- Industry delinquency rates
- Size and age of company
With a business credit report, you get a credit score and details about various aspects that produce the score.
Payment History
A track record of payments is one of the most important factors used when business credit scores are calculated.
Payment history will tell you a lot. If a business is paying its bills on time consistently, it is using credit responsibly. Late, missed, or delinquent payments are red flags, showing potential problems on the horizon, especially if they happen frequently and recently.
Credit Utilization
Businesses with a low credit utilization are generally considered a better risk. A low utilization rate shows they are using only a small part of their available credit. In case they run into trouble, they have options.
On the flip side, if a business has a high credit utilization ratio, it is using a large portion of its available credit. This might indicate a potential financial strain and increase your concerns. If there is still a significant amount owed on delinquent accounts, it’s a major concern.
Debt-to-Income Ratio
Another way to evaluate business creditworthiness is to look at a company’s debt-to-income (DTI) ratio. While a “good DTI” ratio will vary by industry, the lower the number, the better. Generally, a DTI of 36% or less is optimal.
This ratio shows how much of income is used to pay debt obligations. Businesses with a lower DTI have access to more capital, which means they are more likely to be able to pay their bills.
Public Filings
Even a business that appears to be in good shape can have financial troubles. Checking public filings can uncover adverse actions, such as:
- Bankruptcy filings
- Liens or judgments
- Collections
- Uniform Commercial Code (UCC) filing
UCC filings are official notices that lenders use to show a security interest in an asset or property. In case of a default, lenders have a claim to these assets—meaning they can’t be sold off to pay other outstanding debts.
Get Business Credit Reports Instantly
You can probe deeply into a business’s financial health, reviewing tax returns, balance sheets, P&L statements, and more. A business credit report, however, is the easiest way to get a snapshot of financial health.
Depending on the type of business credit report you get, you can see adverse public filings, credit utilization, payment history, and more. While you get an overall business credit score, you also get tracking and analysis of the key metrics that go into score calculations.
At Command Credit, you can pull business credit reports from each or all of the credit reporting bureaus without having to go to each one of them individually or sign up for a long-term subscription. You can retrieve them instantly and make sound decisions about business creditworthiness.
Get business credit reports at Command Credit.