Whenever Moody’s or Standard & Poor’s release their credit ratings it creates waves in the industry. A good, bad or stable rating not only impacts the market but the government too. Every company which works diligently by following the stringent guidelines of ace financial institutions often hope to earn upgraded or high credit ratings.
A higher rating benefits multiple stakeholders in various ways but before going into its benefit it is important to understand how credit rating agencies calculate their ratings.
Ratings get evaluated on various vital parameters like economic structure and performance, government finances, external payment and debt and susceptibility to a possible event. In fact, top agencies also consult with various stakeholders in government, labour, civil society and the private sector before coming to any conclusion.
Benefits of a Good Credit Rating
Easy Loan Approval with Lesser Interest Rates: Banks run on the interest earned not on the repayment of principal amount. Good credit ratings create a positive impression of a company/government and other independent institution and help lenders to get approved their loan in quickest time possible. Moreover, a high credit rating lowers the interest rate on fixed deposits, debentures, or bonds among other and thus ultimately benefits lenders financially. It is more like an assurance to the lender that money and interest will be paid back in time without any default.
Help in Taking Better Investment Decision: People do invest money to earn better profits but not all make the right decision of where to invest. Investing in a risky company can prove to be a disaster. No bank or financial institution gives money to a dicey customer. A good rating gives investor an idea about the credit worthiness of an individual company and the risk factors associated with it. This can help investor to safely park their money in the right company and ultimately help them to make a better investment decision.
Use as a Better Marketing Tool: Every company invests some amount on their marketing campaign to create a positive brand image of their products and services among all stakeholders. Many companies even run million dollars campaign to allure targeted customers through various marketing gimmicks. But is investing millions alone in the marketing the only way to promote a company? The answer is no. The other powerful method of promoting a company is through its high credit rating as it is more trustworthy and transparent which creates a far deeper impact on investors mind than some cheap marketing gimmick. Just by showing the upgraded ratings through social media can save millions and also allure varied stakeholders to invest in your company that too with just the word-of-mouth publicity. Any company can fill its coffers in least efforts with having high credit ratings.
Boost Motivation and Encourage Growth: A good credit rating is a reflection that a particular company is moving in a right direction. Its gives a sense of pride for all the employees and the management and help them to do much better. It provides a motivation to the promoters and makes them feel confident that their efforts are recognized by industry veterans and encourage to further innovate and expand their business operations. High credit rating is also seen as a symbol of self-discipline in the financial process and encourages other companies to follow the same in their businesses to avoid loss or failure.
Benefit Brokers to do better: There are many stakeholders who are directly or indirectly associated with the financial operations of any organizations like stock brokers, financial intermediaries or more. Such professionals always find hard time convincing the investor to buy shares and other financial instruments in a timely and effective manner. Buyers don’t usually understand the financial health of any organization just by looking into the balance sheet, past record, management’s calibre and more. In such a scenario, even if a company is doing good, buyers don’t trust that easily. High ratings empower brokers and other financial intermediaries to convince a client very easily that too by saving precious time, energy, costs and manpower.
The Other Effect
On the other hand low credit ratings have its bad effects on an economy. The credit ratings of many corporations and banks are interlinked with the federal government and whenever a downgrade in government’s rating occurs then it create ripple effects on other companies, investors and individual borrowers. Moreover, share market, and sometimes foreign government also get affected with a low ratings and often seen as some crises (mild or large). A reduction in government’s rating increases borrowing costs and gives invitation to downfall in investment which ultimately slows down economy. It is thus important to manage company’s finances better and implement new-age financial reforms so that even some external factors do not incur more losses to the business and help maintain progression plans successfully.
– Ashwini Deshmukh