What is the rating of the company you invest in? A review of credit ratings

Credit rating agencies evaluate companies and help investors better understand the risk they face

Scoring is one of the most useful resources for human beings. Colleges and universities evaluate the knowledge of their students through grades. Foods are labeled according to their nutritional quality. Vehicles have stickers that reflect the emissions they generate. Even hotels are governed by a star system, which indicates the services available in their rooms. And credit ratings are another example.

In a nutshell, the rating represents quickly and visually the quality of a given product or service. It synthesizes complex matters in a letter, a number or a color, making it easy for the general public to understand.

The credit rating is a score given to companies based on their credit history. This rating summarizes the company's ability to repay loans and meet its debts. It results from an exhaustive analysis by rating agencies, which study its solvency and the possibility of non-payment to its investors.

Although credit rating generally concerns organizations, it could also apply to individuals or countries issuing debt.

What is a credit rating for?

A credit rating is awarded after an intensive study of the business's financial situation in question, in which all its assets and liabilities are analyzed.

It provides investors with more information for making investment decisions. For example, with the rating, they can easily check whether the company can repay the loan without any problems or whether, on the contrary, it may encounter certain difficulties in repaying the money.

In short, the credit rating works as a guide, illuminating the path of people interested in investment and guiding them in the search for a company that suits their needs, reinforcing the honesty and transparency of the financial system.

Savers are the main beneficiaries of this system since they have access to extremely valuable information, which helps them to become aware of the risk they assume when initiating any operation and to design their investment strategies.

However, it should be borne in mind that not all the factors that influence credit rating depend on the activities and management of the organization itself. In addition, some external elements can raise or lower the score, such as the sector to which the business belongs, which may be booming or in crisis.

The role of rating agencies

The role played by rating agencies is of critical importance. These firms must be impartial to guarantee their objectivity and prevent personal or economic interests from altering the final rating. After all, if the final rating does not match reality, investors are misled. It is, therefore, crucial to prioritize their independence.

These companies bear a great responsibility since their valuations either stimulate or discourage investment. Their influence is significant, so they must make a truthful and fair judgment.

To do so, they gather all kinds of information about the company to be audited, examining all its reports and documents: the balance sheet, payment history, profit and loss account, and share price history…

Moody's, Fitch Ratings and Standard & Poor's are three of the most renowned credit rating agencies in the United States.

How do you measure risk?

The evaluation of businesses is a very delicate activity. It is not a freehand task but a series of parameters guiding credit rating agencies. Depending on whether the organization under study complies with them, the grade obtained will be higher or lower.

In many cases, the rating is expressed using an alphanumeric code. Thus, companies with the best practices and the lowest risk get an AAA, while those regularly facing solvency problems settle for a C.

However, it is important to remember that each entity works with its scales. These are not standardized. Therefore, while 1 is the highest grade given by some, for others, it is the first rung on the ladder and signals a very high level of risk.

Before confirming any operation, it is advisable to check the scale used by the agency. Savers familiar with one firm may need clarification if they consult the ratings of another.

Generally, the worse the rating, the higher the interest the investor receives. Why does this happen? Companies will try to compensate for the risk of their products by offering a juicier financial return. However, if the credit rating falls below a certain point, it will no longer be considered an investment, and the transaction will enter the realm of speculation.

Along with the final rating, it is customary for firms to include the future outlook they have drawn for the organization. If this is positive, an improvement in its financial situation is expected. If negative, there is little hope of a rebound, and a downturn could be imminent. If it is stable, your financial health will not change much.

Finally, it should be borne in mind that the risk of short-term investments is not identical to that of long-term investments. In the former, priority is given to the liquidity of the business. In the latter, focusing on its solidity and solvency over time is preferable.

The credit ratings used by Inversa Invoice Market

Inversa Invoice Market has a strong commitment to ethical investment. For this reason, we incorporate various mechanisms that reinforce the transparency of our marketplace.

We work closely with INFORMA and Dun & Bradstreet to contribute to investor protection. Two agencies that are known for their independence and that analyze the creditworthiness of companies, looking in depth at their ability to meet their obligations.

At the national level, the INFORMA rating classifies companies according to their level of risk on a scale of 0 to 20. Those with a credit rating higher than 16 do not entail great risks, unlike those whose rating is lower than 7.

Internationally, the Dun & Bradstreet rating categorizes organizations from 1 to 4. The higher the number, the higher the business risk, so at Inversa, we do not work with those businesses that score a 4.

Likewise, the INFORMA D&B Credit Opinion, which defines the maximum amount of credit recommended for investing in a company, is useful for guiding investors.

On the other hand, at Inversa, we conduct a redemption analysis of each company based on data from our platform. Based on its repayment history, we examine the company's past compliance or possible payment delays.

We also conduct an internal financial analysis, studying and thoroughly verifying the financial information provided to us by the assignors. In addition, at the same time, an insurer audits the solvency and financial situation of the debtor on the insured invoices, establishing a maximum risk limit.

This combination of valuations is an ideal complement to the credit rating, as it multiplies the information available to savers and protects them even more from investment risks.