Most of the businesses today always find that they are short on capital vs their growth plans. Some need funds to survive. Now, for bootstrapped business ( startups) and SME’s ( who don’t plunge into the equity- valuation pool), the most important aspect of raising capital, mostly in debt form – is the business’ and promoter’s credit worthiness.
Today most of an individual credit worthiness is available online. CIBIL score gives a clear picture of a person’s past performance in payments and defaults, while credit rating of businesses by professional rating agencies like CRISIL or ICRA in India ( and a dozen’s of others), or Moody’s and S&P across the world, becomes an important factor in assessing the risks of defaults.
Personal credit discipline of promoters is also a key consideration. Some debt instruments have a clear pre-requisite of promoter’s details being validated before debt instruments come in. The purpose is obvious, it seems that the normal behavior to assess if in the larger world the promoter considers loans as payouts.
Finally, there are lending practices today based on social credit worthiness. People who are not part of the banking system, especially college goers or young adults without credit history are assessed based on new age technology driven tools based on social media foot print.
There are opportunities where credit worthiness is not an issue- but to do with unsecured loans. Here the major assessment is on the viability of the project and cash flow to pay the interest on the agreed period. These amounts are typically small and are generally considered pocket money which will help for short term working capital or capex needs.
However, the basics still stand ground. The ability of debt repayment is a single most important factor, hence credit worthiness when it comes to availing debt opportunities – this is across the world. So if you are a promoter, be sure to work on maintaining individual and company creditworthiness.
~ Ashok Subramanian