ASSESSENT OF RISK
Credit risk assessment is the study of the company’s financial history, level of technological development, risk-manager systems, cash flow, liquidity, resilience to market situations, etc. Financial evaluation is also influenced by credit performance, credit payment history, current debt length of credit history, financial ratios, such as liquidity ratios, efficiency ratios, etc. These facto are given due weight age to analyze company’s business and market position.
CRAs employ various techniques to evaluate the credit risk. Quick Rating Model (QRM) for enabling a quick and easy evaluation of an organization’s worthiness is adopted at times. The applicability of this model is, however, confined to manufacturing and infrastructure only. Similarly, CARE, ICRA and Fitch follow their own off-the-shelf models for credit quality assessment. It becomes easier for CRAs to rate big corporate entities with known promoters, experienced management, but the challenge that a CRA faces is in rating a fresh company with lack of a track record. CRAs have to focus on promoters and general management of the startup in addition to a few profitability parameters and projected cash flows.
RATING CRITERIA
The ratings are divided into four major categories, namely,
1. AAA
2. AA
3. A
4. BBB
5. BB
6. B
7. C
8. D
From 1 to 3 it is the highest to adequate safety. 4, 5 and 6 are moderate to inadequate safety, C is substantial risk and D is for default. The rating obtained by the said instrument merit stays throughout the life of the instrument until it expires or until some external or internal events bring about a change in the risks associated.
FACTORS
One must look for the following factors which affect Credit Rating
1. Credit performance history.
2. Past, current and projected financial performance.
3. Legal framework.
4. Management.
5. Resilience to market fluctuations
INFLUENCE ON INVESTORS
A company with a good profit margin, asset turnover and leverage will be easily rated in the A segment, provided it has a good credit history and clean accounting practices. Good profit margins and turnover with a somewhat irregular credit history usually fetches a B rating. It will face slightly higher rates of interest for debt, or in the most extreme cases, refusal from a few credit lenders. A C rating poses a substantial risk to a lender. There are certain legal bodies, which lend money to such borrowers who are refused credit by mainstream credit institutions.
BEST TIME
Some analysts believe that the ideal time for a startup to go for a rating is when it has at least a couple of healthy balance-sheets to show. However, others believe that the right time is any time before a startup starts looking for external funding. Irrespective of these varying opinions, all analysts agree on the importance of putting credit-rating enhancement mechanisms in place. More than anything else, these mechanisms provide startups a way out, and vary from credit guarantees to cash flow prioritizations.