How can you assess a lessee's creditworthiness?

1 Credit rating

One of the first things to check is the credit rating of the lessee. This is a numerical or alphabetical score that reflects the lessee's ability and willingness to repay their debts. Credit rating agencies, such as Moody's, Standard & Poor's, or Fitch, assign ratings based on various factors, such as financial performance, debt level, industry outlook, and political stability. A higher rating indicates a lower probability of default and a lower cost of borrowing. A lower rating implies a higher risk and a higher interest rate. You can use the credit rating as a benchmark to compare different lessees and to negotiate the lease terms.

2 Financial statements

Another way to assess a lessee's creditworthiness is to analyze their financial statements. These are documents that show the lessee's income, expenses, assets, liabilities, and cash flows. You can use them to calculate some key financial ratios, such as profitability, liquidity, solvency, and efficiency. These ratios measure how well the lessee is generating profits, managing its cash flow, covering its debts, and utilizing its resources. You can also compare these ratios with the industry averages or the lessee's peers to see how they perform relative to their competitors.

3 Business model

A third factor to consider is the lessee's business model. This is the way the lessee creates, delivers, and captures value from its customers. You can evaluate the lessee's business model by looking at its value proposition, target market, revenue streams, cost structure, competitive advantage, and growth potential. You can also examine the lessee's strategic goals, objectives, and plans to see how they align with your own. A strong business model indicates that the lessee has a clear vision, a loyal customer base, a diversified income, a lean operation, a distinctive edge, and a scalable opportunity.

4 Operational history

A fourth aspect to look at is the lessee's operational history. This is the record of the lessee's past and current activities, achievements, and challenges. You can review the lessee's operational history by checking its track record, reputation, compliance, and performance. You can also verify the lessee's references, testimonials, awards, and accreditations to see what others say about them. A positive operational history shows that the lessee has a proven experience, a solid reputation, a high compliance, and a consistent performance.

5 Future outlook

A fifth element to weigh in is the lessee's future outlook. This is the projection of the lessee's future performance, opportunities, and risks. You can estimate the lessee's future outlook by forecasting its revenue, expenses, cash flow, and profitability. You can also identify the lessee's opportunities, such as new markets, products, or partnerships, and the lessee's risks, such as economic downturn, regulatory changes, or competitive threats. A favorable future outlook suggests that the lessee has a sustainable growth, a positive cash flow, and a resilient business.

6 Risk assessment

A sixth and final step is to conduct a risk assessment of the lessee. This is the process of identifying, analyzing, and evaluating the potential hazards and uncertainties that may affect the lessee's ability and willingness to fulfill the lease obligations. You can conduct a risk assessment by using various tools, such as risk matrices, risk registers, or risk maps. You can also implement some risk mitigation strategies, such as risk avoidance, risk reduction, risk transfer, or risk retention. A comprehensive risk assessment helps you to quantify the level of risk involved in leasing to the lessee and to decide whether the expected return is worth the potential loss.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?