Credit ratings and credit scores often get mixed up and bundled into the same financial terms basket.
However, they are distinctly different, and in this post, we explain the differences between the two and why having a high/strong credit rating is important to business.
For further information on understanding credit ratings and for support with credit policies, procedures, and best practices when it comes to collection techniques, visit our page to find out more and to see how our team can support you.
What is a credit rating?
Definition of credit rating – an assessment carried out on a business (with information often provided by credit reference agencies), analysing the business’s ability to repay a debt, i.e., it is a way to evaluate a company’s creditworthiness -will they repay their debts on time and in full?
Credit ratings are issued to companies and can be used by other businesses and even investors to better understand the level of financial risk associated with that particular company.
Providing detailed information on defaults and level of risk helps lenders and investors to make more informed decisions regarding joining forces with certain companies and becoming financially tied to them.
In essence, a credit rating score can help to indicate the likelihood of a business defaulting on a payment.
However, it is important to note that having this score is still not a 100% assurance or complete iron-clad guarantee that you will be paid. Having robust credit control processes and procedures in place and working with experienced collection teams who can support when defaults occur is still the most proactive way to protect your business.
Credit Scores
When we look at credit scores – credit scores relate to individuals and their personal finances. Every individual will have their own credit score, and this score is based on that individual’s personal financial history.
Credit scores are often checked by lenders when they are considering offering a loan agreement to an individual.
Credit scores are specific numbers that can go up or down depending on your own individual circumstances. Compared to credit ratings, which are a series of letters, for example, a credit rating of AAA is at the top with C/D at the bottom.
Your credit score will be shown in your credit report, which contains a collection of data showing an individual’s borrowing history, any missed payments, any CCJs, insolvency requests, and more.
The importance of credit ratings
- A credit rating highlights the level of risk involved in lending money and actually getting the repayments back. Providing a business that lends money the confidence that debts will be repaid.
- Credit rating can affect a business’s ability to access loans and access lower interest rates.
- It can help you make better, more informed financial decisions and improve overall financial health.
- Promotes transparency and consistency while helping to manage risk.
A high credit rating indicates a good level of risk (often meaning the better your loan conditions). In contrast, a low credit rating may highlight that the company in question might struggle to repay its debt/could be facing financial difficulties.
If you have a low credit rating, it’s important to note that you may struggle to get credit. You could face potentially higher interest rates as the risk to the lender is higher, and the term of the credit agreement could be shorter.
How is a credit rating built?
A business’s credit rating is based on several factors, including:
- Payment history, including financial statements, annual reports, analyst reports, etc.
- If there have been any missed payments in the past
- The amount the business currently owes
- Current cash flow and income
- Debt to equity ratio
- Industry trends
- Political environment
- Market and economic outlook, etc.
As a professional debt recovery agency, our advice to improve and build strong credit ratings is to:
- Always pay on time
- Ensure that all data held by credit reference agencies is up-to-date and correct.
Small business debt commercial debt recovery process
Everyone wants to avoid the risk of default, which is why credit ratings are so important.
In describing the financial health of a business, a credit rating can show how likely a lender will provide a business with credit. And it’s important to note that each lender can have its own criteria for whether to offer a business credit or not.
However, if you do fall victim to an overdue invoice or late payment, which is now negatively affecting your business, look to work with a professional and experienced collection agency like Direct Route.
Supporting you with your credit control processes and procedures, our team has the skills, the debt collection techniques (tried, tested, and successful), and a friendly approach that helps you to maintain your client relationship.
To see how we can help you with the small business debt commercial debt recovery process, call +447860197476 or email: memberbenefits@directroute.co.uk