News & Resources

How investors calculate your company''s credit risk

Feb 24, 2011 Brian Bradley

For many small business owners, financing is everything. In a recent article for Investopedia, writer Yuval Bar-Or gives some insight into how an investor will calculate a business' credit worthiness and its risk of defaulting on payments. The best way to measure credit quality is to get a corporate rating. While the most trustworthy credit raters only deal with large firms, an investor can use a probability of default model to rate a smaller company. To build a PD model, gather data from financial statements to figure out the business variables that determine a business' success. These "drivers" include leverage, liquidity, profitability, size, expenses and assets, Bar-Or writes. When comparing a potential investment to other companies in the industry, identify the ones that have defaulted on their financial obligations. This will give a sense of the likelihood that a particular company will succeed or fail, Bar-Or suggests. The search for financing can be strenuous, and fortunately, private investors are not the only source of cash for small business owners. The U.S. Small Business Administration recently announced the State Trade and Export Promotion program, through which the federal government will be giving $90 million in grants to help U.S. exporters over the next three years.