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What is Credit Rating and its role in doing business?

What is Credit Rating and its role in doing business?

Thursday 27, 08 2020
Credit rating can be applied to any organization wishing to borrow money - individual, company, state or provincial government. Credit rating for companies and governments is usually conducted by a credit rating agency such as Standard & Poor's, Mood

Credit rating is the judgement about how likely a debt is paid. Credit rating can be applied to any organization wishing to borrow money - individual, company, state or provincial government. Credit rating for companies and governments is usually conducted by a credit rating agency such as Standard & Poor's, Moody's or Fitch. These rating agencies will be hired by an organization looking for a rating service for themselves or one of their debt issues.

Decipher of “Credit Rating”

Basically, a debt is considered a promise, and a credit rating will determine the likelihood that the borrower will repay that debt.

Credit rating influences the chances that a borrower is approved for a loan and how much the loan is. A high credit rating score indicates the ability to repay the entire loan without any problems; A low credit rating score indicates that the borrower has had difficulties repaying the loan in the past and that it may be repetitive in the future.

Credit rating agencies usually use letters in the rating. For example, Standard & Poor's has a rating scale from AAA (excellent) and AA + to C and D. Debt rated below BBB - is considered a speculative or junk bond, which means the company is likely to default.

What is Credit Rating and its role in doing business?

Why is Credit Ratings important?

For borrowers:

Credit rating scores impact the loan decision, more importantly the decision on the interest rate of the creditors/. Thus, the borrowers will try to obtain the highest credit rating score possible, while the rating agencies must have an honest and objective view of the borrower's financial condition that affects their ability to handle debt settlement.

For investors:

Credit ratings also play a big role in determining whether potential buyers should buy bonds. Low credit rating scores mean high investment risk; this also indicates that there is a high probability that the company will not pay back the profits. To better understand the importance of Credit ratings to investors, read Why FDI Investors Should Read Credit Report.

For financial markets:

Changes in credit ratings have had a significant impact on the financial markets. For example, the market's reaction to the downgrading of the US Federal Reserve's by Standard & Poor's on August 5, 2011 caused the consecutive-week fall of global stock markets to fall.

Factors affecting Credit Rating score

There are several factors that rating agencies use to give credit rating scores.
Firstly, the company's payment history will be reviewed. Payments that are missed or unpaid have negative impacts on the rating scores. Credit rating agencies also look at the future business potential of the company. Credit ratings tend to be higher if there is positive outlook and vice versa.

In addition to financial factors, credit rating agencies also use a number of non-financial factors such as managerial level, current position of the business in the industry, future vision, business performance ... To better understand the factors affecting the credit rating, you can read 60% of VietnamCredit's credit rating results from non-financial factors.

History

Moody's was the first agency to issue public credit ratings for bonds in 1909, and decades later, other agencies followed their footprints. These ratings did not have a profound effect on the market until 1936, when a new regulation was passed, which determined that banks would be prohibited from investing in speculative bonds or those with low credit ratings to avoid risks. This fact was quickly accepted by other companies and financial institutions, and relying on credit ratings became the norm.

In Vietnam, there has not been any companies and organizations operating in the credit rating field. However, VietnamCredit Joint Stock Company has a history of more than 20 years providing business information that helps minimize commercial risks and boosts business development.

VietnamCredit’s company reports provide up-to-date information on partners, customers or distributors. Each report will help you understand the level of credibility so you can negotiate more effectively with partners, customers and competitors. In addition, our company reports can be used for reference purposes to assess credit limit and the current repayment capacity of the customers. Should you take any interest in the services of VietnamCredit, please contact us at [email protected]

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