A commercial credit rating is an evaluation of the financial stability of a business, financial institution or financial product, such as a bond. Commercial credit reporting agencies compile information and assign credit ratings based on their findings. Some agencies focus on only one type of business activity, and others provide a wider range of assessments.
A business credit rating is based on all of the available information that a credit reporting agency can gather about the business. Published financial statements, press releases and public filings all provide data. A reporting agency might search public records for information about legal proceedings, property liens or regulatory enforcement actions. Agencies collect references from trade creditors about the payment history of the subject business. Some agencies send biannual questionnaires to businesses to ask about their operations.
After the credit reporting agency assembles all the collected data about a company, the details are analyzed to identify positive or negative trends in sales, debt levels, cash flow and other financial indicators. Based on the analyses, the credit reporting agency assigns a commercial credit rating to the business. Rating scales vary between agencies, but they represent rating levels from poor to excellent. Some agencies use numeric scales and others use alphabetic scales, such as one in which "AAA" is the best possible score. A commercial credit rating might incorporate information about the size of the company as well as its credit score.
Credit reporting agencies provide the results of their credit investigations to other companies to help them make decisions about whether to extend credit or to have business dealings with certain companies. Credit reporting agencies often make information available on a subscription basis, giving subscribers access to a full range of analyses and reports. Special detailed reports about individual companies also are available upon request at an additional cost. A large commercial credit reporting agency might maintain records on more than 100 million businesses worldwide.
Some credit reporting agencies specialize in the rating of bonds, both corporate and municipal. The rating of bonds is important, because unlike stocks, which represent ownership of a fraction of the company, bonds are debt instruments that represent a promise to pay back a loan. If the company or municipality issuing the bonds is not financially sound, the ability to repay the debt may be questionable. As a bond's commercial credit rating decreases, the rate of interest that must be paid to the bondholders generally increases to reflect the greater risk.
An individual credit rating for a consumer is similar to a commercial credit rating in that it assesses the probable ability of the consumer to repay the debts incurred. An individual credit rating is based substantially on the ratio of income to total debt and payment history. A commercial credit rating incorporates those factors, plus information about the health of the industry, economic outlook and capital funding.