What it means
Every lender writes its criteria into a credit policy, which sets out who it will lend to, how much, at what price and against what security. Front-line staff can approve deals inside those boundaries, while anything outside them requires escalation to a credit committee.
Criteria exist to make lending consistent and defensible rather than dependent on whoever happens to read the file. For a borrower, criteria are the rules of a game you can prepare for.
A lender that requires two years of filed accounts and a debt service coverage ratio above 1.25 is telling you exactly what to fix before applying, and often exactly which lender to approach instead if you cannot. Criteria typically fall into five groups: capacity to repay, capital or owner contribution, collateral, conditions in the sector or economy, and character or payment history.
Most credit policies convert these into a scorecard so that applications can be ranked and priced rather than simply approved or refused. Trade credit criteria work the same way at a smaller scale.
A supplier deciding terms for a new customer will set a credit limit based on bureau data, trade references and order size, and will often start conservatively and increase the limit as payment behaviour proves out. The nuance that surprises many founders is that criteria move with the credit cycle.
The same business, with identical numbers, can clear a lender's threshold comfortably in an expansion and fall short of it 18 months later because the policy has been tightened, not because anything about the business has changed.
In practice
Real-world examples.
Example
A specialist equipment lender requires a minimum of three years trading, annual revenue above $500,000 and no unsatisfied court judgments. A two-year-old engineering firm with $900,000 of revenue is declined on trading history alone and is redirected to an asset finance provider whose criteria start at 12 months.
Example
A packaging supplier sets trade credit criteria of a $15,000 opening limit for customers with a clean bureau file and 50% prepayment for anyone with a filed default. A new retail customer with one historic default is offered $8,000 of terms after providing two satisfactory trade references.
Example
A bank tightens its criteria for hospitality lending, raising the required debt service coverage ratio from 1.20 to 1.45. A cafe group that was pre-approved in March is refused in September on the same financial statements, and the relationship manager suggests reducing the loan request by $180,000 to fit.
Formula
Calculation
Most credit criteria are applied through a weighted scorecard.
Weighted Credit Score = Sum of (Criterion Score x Criterion Weight)
A commercial lender scores applicants on four criteria: debt service coverage at a weight of 40%, trading history at 20%, payment record at 25% and gearing at 15%. A bakery chain applying for a $600,000 expansion loan scores 85 out of 100 on coverage, 60 on trading history, 90 on payment record and 50 on gearing.
Weighted Credit Score = (85 x 0.40) + (60 x 0.20) + (90 x 0.25) + (50 x 0.15)
= 34 + 12 + 22.5 + 7.5
= 76
The lender's policy sets 70 as the threshold for automatic approval and 60 for referral to a credit officer. At 76 the bakery is approved, but because the gearing score of 50 sits below the individual sub-limit of 55, the approval carries a covenant capping additional borrowing at $100,000 without consent.Case study
Seen in the real world.
Sandcastle Play Cafes is an invented business used here as an illustrative example. Its founder applied to five lenders in six weeks and was declined by all five, which she read as a verdict on her business model rather than on her paperwork.
A broker then obtained each lender's published criteria and mapped the application against them. Three lenders excluded leisure businesses entirely, one required audited accounts she did not have, and the fifth required an owner contribution of 25% against the 10% she had offered. Only the fifth was ever winnable. She raised her contribution from $40,000 to $100,000 by deferring a van purchase, reapplied to that lender alone, and was approved for $300,000 at 8.4%.
The illustrative point is that five declines can look like a market verdict when they are really four mismatches and one fixable gap.
Watch out
Common mistakes.
- Applying widely in the hope that someone says yes. Each application leaves a search on the file, and a run of declines makes the next lender more cautious rather than less.
- Assuming criteria are only about the numbers. Sector appetite, loan purpose and security type are hard exclusions at many lenders, regardless of how strong the financials look.
- Reading a decline as a judgement on the business. Most declines are policy mismatches, and the same file often clears elsewhere without a single figure changing.
Questions
People also ask.
Are credit criteria published anywhere?
Broad criteria such as minimum trading period and eligible sectors are usually published, while scorecard weights and cut-offs are treated as confidential.
Can criteria be waived?
Yes, through an escalated exception, but exceptions normally require compensating strengths such as extra security, a guarantee or a lower loan-to-value ratio.
Do the criteria differ for existing customers?
Usually yes, because the lender has its own account conduct data, which often carries more weight than any external score.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%