When a company is evaluating its own financial health to plan for growth or for a downturn, an assessment of the company’s current situation and the probability of default helps create a more complete picture.

The same is true for a company that is considering applying for a loan. Knowing your own business credit rating prepares you for potential objections on the part of a lender and can build credibility as you negotiate on rates and fees. Lower rates and fees can mean higher profits for you. When banks assess potential borrowers, they fundamentally are examining the ability of a potential borrower to repay the loan. Analyzing the potential borrower’s assets, cash flow outlook and potential pitfalls are primary objectives. 

Running a business credit report helps individuals recognize their firm’s financial strengths and weaknesses. Currently, many firms are still recovering from the economic recession and are facing financial uncertainty.

When addressing these problems, the first step is to identify the issue. Once you have identified key issues within your firm, the next step is to address them. The Business Credit Report by Sageworks calculates key ratios that banks use in the loan approval process, and they have been proven to be statistically significant in predicting default:

1. Cash to Assets

2. EBITDA to Assets

3. Debt Service Coverage Ratio

4. Liabilities to Assets

5. Net Income to Sales

These ratios are a great place for small business owners to start when they are reviewing their financial health. To help with review, Sageworks takes these ratios, calculates a probability of default percentage, and then translates the percentage into a rating. The Business Credit Report by Sageworks bridges the communication gap between bankers and business owners: bankers are more comfortable with the probability of default percentage whereas small businesses are more comfortable with simple ratings.

Overall, it is important that businesses be aware of their company’s financial health. Running a Business Credit Report is a great start in addressing financial issues for a firm. Sageworks has multiple whitepapers that shed more light on the preceding ratios. One of the whitepapers is about spotting business credit problems, which discusses what metrics best predict default. Another, whitepaper is about credit risk and probability models and their respective benefits. That said, the ongoing U.S. economic recovery and continually tight lending conditions for many firms make it important for businesses to evaluate their creditworthiness and their probability of default.