The credit rating of a business or corporation could make the difference between access to capital or not. There are ways to proactively build a credit rating that is conducive to obtaining financing when the time comes. Agencies that provide a score or grade to a financial picture use certain credit rating criteria to make that determination. Some of those elements include timeliness to repay debts, ability to repay debtors, and the amount of outstanding debt in relation to income or assets.
The criteria that make up a person's credit rating lead to what is known as a FICO score, created by the Fair Isaac Corporation. Lenders evaluate a potential borrower's score to determine the credit worthiness of that individual. The older that a person becomes, the more of a credit history is established. It is possible to repair damaged credit, but the process can take years.
An individual begins earning a credit score with the first line of credit, including a credit card or a loan for an automobile, for instance. Soon, these first lines of credit will become a person's credit history; this behavior is included in credit rating criteria. Potential creditors are interested in an individual's ability to pay debts on or before the due date and shun late payments or collections activity initiated by third-party agencies.
Credit rating criteria that are considered in developing a credit rating include the amount of debt that is outstanding in relation to the available credit that a person has. The closer that credit card debt balances are to the maximum limit, the worse it is for a person's credit score. A credit score can be optimized by maintaining low balances compared with the amount of credit that is approved. The size of all debts, not only credit card debt, is included in credit rating criteria.
Businesses also establish credit histories. Ratings agencies assign grades to companies that trade in the public markets based on credit rating criteria, including the level of debt versus assets on a financial statement. There are explanations tied to these ratings ranging from highly risky to extremely stable. Other criteria that impact the rater's point of view include economic conditions for a specific company, industry, or region in addition to the way that a business chooses to use its profits. If a ratings agency changes its view on a company, the rating can be increased or decreased.