What is a Credit Rating & Why is it so Important?
- – How Important is a Credit Rating?
- – What is a Credit Rating?
- – How is it Established?
- – Does it Relate Solely on Repayment of Loans?
We approach each of these questions from both a personal and a company perspective.
The simple answer to the first question is VERY.
But what is a credit rating and how is it obtained?
Maybe you are one of those people who think that because you don’t have any loans at the moment or have never had a loan you won’t be looked at favourably by a bank. Or if we put that in ‘lender terms’ you may think that having no credit rating is the same as having a bad credit rating. While a lender is more comfortable lending money to someone that they ‘know’ (or can see a track record for) it is simply untrue to say that you will be looked at as bad.
Many lenders now use a computer to verify a client’s credit worthiness by use of a rating system. Simply, if you have a default or have been listed as a slow payer, your application is declined regardless of the reason. Having a broker intervene on your behalf can, if in a genuine case, have the declinal overturned, but the broker must know how to present your information to the lender, to the correct person and present it in the most appropriate way.
Paying habits are only one part of a credit rating. Prior to the computer rating system, all application would be assessed by a credit officer. The basics of this assessment was based on what was / is commonly known as the “4 Cs of Credit”. While this method is not as relevant when it comes to computer assessment it is with manual assessments which generally applies to equipment with a purchase price over $100,000.00.
- – Character
- – Capacity
- – Common Sense
- – Collateral
Character – this is how an applicant has conducted their accounts in the past. Paid on time or had to be reminded regularly. Remember even if you finalise your loan contract within the prescribed term ie: 3 years, 4 years or 5 years but had to be reminded to pay regularly this will be rated as a slow account. Lenders want regular monthly repayments made without the need to remind you.
Capacity – Simply put, the ability to repay the loan based on current and historical information. Pay slips, profit and loss, balance sheet, interim financials. In some cases a cash flow may be needed to demonstrate the ability to meet the commitment.
For Example:
You have just got a new contract on a road project which requires a new 20 tonne excavator but your current financials don’t show the ability to pay repayments, wages for a new operator, fuel, insurance etc so a cash flow is required to demonstrate that with the income from your new contract you can meet these commitments plus have excess after expenses to make it worthwhile.
Hunter Business Finance has the ability to do these cash flows which are acceptable to lenders but will require some input from you and copies of the contract.
Common Sense – What is the purpose of the loan? No lender will give a loan to gamble on a horse race or play roulette at the casino.
Sometimes this common sense becomes a bit “blurred”. Only if they would give me $200,000.00 to buy a truck I could get work and make repayments – it really doesn’t work this way!
Collateral – Two meanings to this:
1. What are you going to use as security for the loan?
- – Buying a car – the car
- – Buying an excavator – the excavator
- – Buying a home – the home
2. What do you have as a backup?
- – Cash in the bank?
- – Are you buying / own your home?
(A lender will not necessarily use this as collateral but they like to know you have it)
Other aspects that a lender looks at which cuts across all of the 4 Cs is:
- – How long have you been at your current and past address?
- – How long have you been self employed or employed?
If you change address every 3 to 4 months and you don’t hold down a job for longer than 3 to 4 months, lenders see this as instability and are reluctant to lend.
The above is an outline on credit rating and does not cover everything, this is a guide. To get the best chance of success and the most competitive and practical loans for cars, boats, earthmoving equipment, trucks etc you should see us at Hunter Business Finance.
Posted: 4/04/2016 10:52:56 am by Hunter Business Finance | with 0 comments