Credit ratings are used to measure how much of a risk a business poses to a lender as well as how likely it is for them to default on the loan.
These ratings are calculated by credit bureaus. They are used to work out how risky the credit applicants are.
The amount of money coming in
How much money that the company is bringing in indicates the position it is in to apply for credit. This includes the working capital available. If there is too little money coming in, the chances of qualifying for finance are considerably lower.
Structure of the company’s debt
High levels of debt impact credit ratings negatively. If a company wants to improve its chances, it should lower the amount of debt it owes. The credit rating is significantly affected by how much credit the company has already made use of.
Consideration of cash flow
Cash flow is a true reflection of the amount of money it actually has. A positive inflow may mean that a company can afford debt repayments. If there are more outflows of cash, this may mean that its credit rating is lowered.
The profile of the business
- Number of employees
What credit ratings calculate:
- How efficient a company is in paying debts off
- If there are enough assets available to pay or if there is collateral
- The business’ character
How a company is rated is dependent on a range of factors. Some of them are flexible and can be changed, while others cannot. For a company that is intent on qualifying for additional credit, taking the steps to improve creditworthiness is important.
Credit ratings can be used to get an overview of company operations