Why is a firms credit rating important?



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Why is a firms credit rating important?

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Any time a company needs to borrow money, the lenders will look at what is called a credit rating of the company. The credit rating indicates how trustworthy or credit worthy a company is which otherwise means what is the capacity of the company to repay this money along with the principle and the interest.

The credit rating is given by an interdependent 3rd party, for example Standard & Poor or Moody's. These credit rating agencies will analyze the company's financial statements and past this tree of borrowings and repayments and arrive at what is called a credit rating of the company. There is typically a credit rating scale used where the credit rating can vary anywhere from triple A all the way to double D based on what kind of a company is rating.

The credit rating is very critical for a company, because it determines what interest rate the company is going to pay on its debt. The better the credit rating means the company has got better chances of paying back its money, hence less risk, hence less interest rate for the company. The lower the credit rating, the higher the chance that the company will default on its loan and hence higher the interest rate on the company. Hence a firm's credit rating is extremely important because it could save a company a lot of money by terms of interest expense and other --------- terms while borrowing money.

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