An assessment of a borrower's creditworthiness and ability to repay debt, expressed as a letter grade or score by rating agencies.
Credit Rating evaluates the likelihood that a borrower (individual, company, or government) will default on debt obligations. For businesses, agencies like CRISIL, ICRA, CARE (India), Moody's, S&P, and Fitch assign ratings from AAA (highest safety) to D (default). Ratings affect interest rates — higher-rated borrowers get cheaper loans. For individuals, credit scores (300–900 in India via CIBIL) determine loan eligibility and rates. Factors include payment history, debt levels, credit utilization, business financials, and industry outlook.
Company A has CRISIL rating 'AA+' and borrows at 8.5% p.a. Company B has rating 'BBB' and borrows at 12% p.a. On a ₹1 crore loan over 5 years, Company B pays ₹17,50,000 more in interest due to lower credit rating. Maintaining strong financials and timely payments directly reduces borrowing costs.
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Key factors: Financial performance (revenue growth, profitability, cash flow), Debt levels (debt-to-equity, interest coverage ratio), Industry risk, Management quality, Payment track record, Liquidity position, and Business diversification. Consistent profitability and low leverage improve ratings.
Personal CIBIL score (300–900) measures individual creditworthiness based on loan/credit card history. Business credit rating (AAA to D) assesses a company's ability to repay specific debt instruments. A promoter's personal score can affect business loan eligibility for MSMEs, but they're separate assessments.
A promise by a bank to cover a financial obligation if the borrower (applicant) fails to fulfill their contractual duties.
The use of borrowed funds (debt) to finance business operations, amplifying both potential returns and risks for equity shareholders.
A financial ratio comparing a company's total debt to its shareholders' equity, measuring how much the business relies on borrowed money versus owner investment.
A potential financial obligation that may arise depending on the outcome of a future uncertain event, such as a pending lawsuit or warranty claim.
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