How to Evaluate Business Credit

by Bradley James Bryant

Overview

Business credit is generally evaluated in the same way that personal credit is evaluated. Credit bureaus collect information from creditors about payment history and apply a scoring to this number. Another consideration is how much income (or revenue in the case of a business) is made. The best way to verify business income (revenues) is by analyzing two important metrics from the income statement.

Step 1

Research financial status and credit history for the business in question. This includes the previous loan payment record. If a business has a good record of paying current creditors and suppliers, chances are they will continue the same habit when it comes time to pay you.
Step 2

Request a credit profile from Dun & Bradstreet. D&B maintains credit profiles on private and public businesses. Reports can range from $50 to several hundred dollars, depending on the amount of detail requested.
Step 3

Calculate the cash flow of the business. This is commonly referred to as EBIT, or earnings before interest and taxes. Use the formula "revenues - cost of goods sold - operating expenses = EBIT." This information is available on the income statement in the 10K, 10Q or annual report for public companies. However, you may need to contact the company directly if the business is private.
Step 4

Calculate current debt capacity. The most common measure used to gauge debt capacity is called the debt capacity ratio (DCR). The formula is "DCR = EBIT / debt payments." This information is available in the D&B credit report and/or the Notes to the Financial Statements in the 10K, 10Q or annual report. You may also calculate EBIT divided by interest payment (also in Notes to the Financial Statements). Both calculations will provide an idea for the cash available to pay off current and/or future debts.

Overview