As individuals, we need credit scores for obtaining any kind of credit. Have you ever wondered if the same applies to companies as well? There are many companies in the market who keep issuing bonds, debentures, accept fixed deposits and another kind of financial instruments. These instruments are nothing but the loans being raised by the companies in question. Just like how we apply for loans from a bank/financial institution, companies raise funds from public or from financial institutions.
But as a layman how do you gauge if the particular company is worth lending to? What if the company goes bust and you lose your money? Fear not!! Companies also have credit scores but it is called as Credit Rating.
What Is Credit Rating?
Similar to credit scores, companies are rated on the basis of various parameters like
Existing financial structure
Impact of future debt on the company
Ability to repay periodical interest and principal
Past debt repayment history
General economic conditions in the country and that particular industry
Additional Reading: All You Need to Know About Building Good Business Credit
Can you draw a parallel between credit scores and credit ratings? The background on which the ratings/scores are issued is more or less same. However, there is a lengthy procedure involved before a credit rating agency issues credit ratings are issued to companies. A thorough analysis of all information available is done, extensive discussions are held with the management and stakeholders. Post which, credit ratings are issued.
Who Issues Credit Ratings to Companies?
There are agencies that specialize in issuing credit ratings to companies, government agencies, special purpose vehicles, mutual funds etc. In India the most well-known credit rating agencies are
CRISIL - Credit Rating Information Services of India Limited
CARE - Credit Analysis and Research Limited
ICRA -Investment Information and Credit Rating Agency
SMERA - Small and Medium Enterprises Rating Agency of India
India Ratings and Research (Fitch Group)
You might also note that in the case of individuals, the credit score is provided by credit information companies (CIC) or credit bureaus.
How Are Credit Ratings Represented?
While credit ratings to individuals are represented in form of numbers in the range of 300-900, it is not so simple for companies and other bodies looking to borrow money.
The ratings issued vary depending on the type of the financial instrument and the duration of the same. For example India Ratings and Research issues ratings in the range of IND-AAA, IND-AA, IND - A, IND -BBB, IND - BB, IND -C and IND-D for Long-Term Debt Instruments [the instruments with an original maturity exceeding one year].
Here Instruments with IND-AAA rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry lowest credit risk.
Additional Reading: How do banks evaluate creditworthiness for business credit cards?
It is important to know that each agency has its own model for ratings for different instruments. Also unlike an individual credit score which can be obtained from any credit bureaus, credit ratings are issued only by one credit rating agency.
So next time you come across an attractive debenture or a fixed deposit issue by a company, do not just make a decision on the basis of interest rate. Go ahead and check the credit rating issued to the particular instrument.
If you are looking to know your own credit worthiness then go ahead and check your credit score for free and create your credit profile.