What is a Credit Rating?
Credit rating is the measurement of how likely you are to repay your debts and be financially responsible with them, rather than default or run up any further large debts. Credit scores according to our credit rating consultants, are sent out by credit bureaus to lenders for someone who borrows money.
A credit rating system is a set of rules for determining the creditworthiness of borrowers. Credit ratings provide lenders with a standardized method for evaluating the risk posed by an individual borrower based on their credit history together with other relevant factors such as future ability to pay and the probability of default. In some instances, agencies provide ratings for issuers of debt (debt issuers), particularly corporate bonds, collections, trade receivables, asset-backed securities/collateralized debt obligations (CDOs/CDOs), and mortgage-backed securities (MBSs).
Credit ratings are developed by credit rating agencies (CRAs), which in turn receive their data from parties in the financial industry who maintain borrower information. CRAs are not law nor are they officially appointed. There are many different CRAs that follow the same rating system of that of the number and amount of credit checks, age of borrowers, past performance, personal history and future potential. This is why you will notice a difference in credit ratings for each company.
CRAs rank borrowers based on the factors given to them by lenders and other financial institutions. Ratings range from excellent (low risk) to default (high risk). The higher your credit rating, the less expensive your loans or mortgage payments will be to you, or it might actually help you get a lower interest rate. Lenders use this data to determine whether it is safe for them to approve you for a loan or loan modification.
How do we Get a Credit Rating?
When you are looking for a business loan, you have to have a good credit rating. The higher your credit score, the more likely you are to get approved for funds — and the better interest rate you will get on your loan, if applicable. You can also earn an enhanced credit rating by providing proof that your business has been around for many years and consistently paid its debts on time. This stability will build customer confidence in your business and indicate that you are likely to continue paying debts in future.
What is a Credit Worth?
Having a good credit rating doesn’t mean that you will get the best credit terms for your business borrowing; it just means that you are likely to get approved for the loan and will receive better interest rates. The average rate of interest on a small business loan is 14% — but it can go as high as 20% or more, depending on the type of financing you’re taking out. Consumers can also use their credit ratings to negotiate with companies like insurers and utility suppliers, in order to get discounts or special deals on their bills.
How is a Credit Rating Calculated?
Credit ratings are calculated in a number of ways. One of the most common is called the FICO algorithm — this determines how much risk you pose to the lender and thus how much risk you can be allowed for when borrowing. The more risk your company poses, the higher your credit rating will be; but take care, as just because your business has a high FICO rating, this doesn’t necessarily mean that you will be approved for all loans you apply for!
How do You Improve your Credit Rating?
As well as being open and transparent about your company’s financial situation, you can also improve your business credit rating by paying all of your debts on time. This will help ensure that your customers are not put off by the risk of dealing with you in future. If you have been toying with the idea of starting up a new business and need some short-term financing to get you going, then consider taking out an invoice finance loan. This is a streamlined way to get upfront capital for your business and it means that there is no need to receive a high credit rating in order to be approved for funds.
What is a Good Credit Rating?
A credit rating of 650 and above is ideal; this shows lenders that you are a very stable business that is unlikely to close down and disappear with their money. You can also save on your business insurance premium by raising your credit rating — so it’s worth considering taking out a business loan just to improve your score if needed! There are many ways to raise your credit score, but the best way to get an instant boost is by providing proof of new assets or equity built up in your company.
What is a Bad Credit Rating?
If you have a credit rating of less than 650, your business will be considered high risk and this may mean that you are not able to get any form of short-term financing. Your business will also be subject to higher premiums on any insurance policies you take out.
How do I check my Business Credit Rating?
Your credit score is available for free and can easily be checked online using various resources.
What is the Best Credit Rating for my Business?
The only thing that matters when it comes to your credit rating is how well you pay your debts back on time; everything else is just secondary.
What Happens if my Credit Rating is Low?
With a low rating, you will find it difficult to get short-term financing if your business needs more cash.