Determining Credit Ratings

Lenders, especially commercial banks, to whom you apply for a loan first find out about your creditworthiness.

They assign their debtors a credit rating based on a combination of an internal scoring procedure and an inquiry with a credit agency. Banks keep the specific criteria and their weightings secret. However, there are certain indications of how creditworthiness is determined.

Banks see an indication of the creditworthiness of credit customers in how reliably they have performed capital services to date, i.e. whether they have regularly paid their agreed interest and repayments in the past or whether payment irregularities have occurred. Information on this is provided by credit agencies. Schufa is often asked to provide information.

Of course, the total liabilities of their loan customers are also relevant for lenders. From this, they can see what payment obligations they have already entered into and how high their capital services already are.

On the other hand, lenders are interested in the earnings and asset situation of their loan customers. They want to get an idea of whether their customers can actually afford both their previous payment obligations and obligations from any new loans. In the event of a loan default, i.e. if customers are unable to meet their payment obligations, lenders have assets assigned to them as collateral, which they can then liquidate.

Credit ratings are affected by the size of the business volume transacted. A larger company generally receives a better rating than a smaller one.

Credit ratings are affected not only by the past return itself, but also by the forecasts concerning the return, because investors plan for the future. They do not like fluctuations that are difficult to plan.

A high dependence of the company on its management, on its top executives and on a few key employees also weighs on the credit rating.

The more diversified the company is in the market, the lower the risk is assessed and the more favorable the effect on the credit rating.

When it comes to the question of internationalization of sales, the opinions of the capital providers are obviously divided. While some value an international business in their credit rating, others penalize globally networked dependencies in their credit rating. The same applies to integration into globally networked supply chains.

All providers of capital downgrade the creditworthiness of companies that depend on certain suppliers.

In addition, capital providers look at the business performance of companies. If the business under consideration generates better earnings than the industry average, bonus points are awarded; otherwise, negative points are awarded in the credit rating. Similarly, how cyclical the company’s business is also plays a role. Most capital providers do not value cyclicality.

The question of how dependent a company’s business is on technical progress is also relevant for capital providers. Companies with low dependency on technical progress are given a better credit rating than companies with a high dependency on technical progress.

Not only the respective company itself, but also the industry in which credit customers operate influences the credit rating. Companies operating in industries exposed to above-average risks are rated lower than companies operating in industries with below-average risks.

Low-capital-intensity industries are favored over high-capital-intensity industries for the same returns.

The intensity of competition in the industry is also a criterion for the credit rating. However, some institutions rate industries with high competitive intensity as more favorable in terms of corporate creditworthiness and others as less favorable. The former see the agility of companies in highly competitive markets as an advantage, while others see competitive pressure as a disadvantage.

Last but not least, entrepreneurial personality is a credit rating driver. Keep up the communicative exchange with your house bank. The personality factor and the relationship between you and your bank influence the trust relationship and have a high weighting in the credit rating.

To obtain the best possible credit rating, open communication with commercial banks is beneficial. Keep your bank informed about your business performance without being asked. Inform your bank of perceived risks in advance of events occurring and involve them directly in finding financing solutions. You will usually gain more trust than if you seek contact only when you acutely need help.

When inquiring about credit, instruct your bank to request credit-related information from credit bureaus not for a credit inquiry, but only for a terms inquiry. Requests for information concerning inquiries on condition are not published by credit agencies, whereas requests for information on credit inquiries are published and can therefore be viewed by all other commercial banks. If it becomes known that you are talking to several banks in parallel about a loan, the interest conditions for you could deteriorate.

Credit ratings influence the credit opportunities of companies.


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