Why the score is important for founders
For founders, even more depends on a good score. Even when founding a corporation, the founder is in many cases, at least initially as a private person, liable for any external financing. One of the greatest challenges for founders is to find a bank to finance their own project. If the credit decision-makers at the bank are convinced of the project, a self-assessment of the shareholders must be drawn up and the assets contained therein must be documented accordingly.
Even if there is a guarantee, for example from a guarantee bank, the personal creditworthiness is checked. In the case of leasing or other financing projects, the shareholders or the newly founded company also carry out a credit check.
A further complicating factor is that the data from the credit reporting agencies are not always up-to-date. In the “Consumer Information Scoring” of the Federal Ministry of Food, Agriculture and Consumer Protection from 2009, reference is made to a study in which only 12% of the respondents in a representative population survey in 2007 knew the term “scoring”.
On behalf of the Federal Ministry, a research group of 100 test persons from all over Germany requested a self-assessment from three credit agencies: SCHUFA, Creditreform and Arvato. In the study, 45% of the information provided by SCHUFA had incorrect, incomplete or incorrect entries.
When assessing the creditworthiness of a company, balance sheet ratios play a major role. In addition to the annual financial statements, the equity ratio, the available cash reserves as well as the free and operative cash flow and of course the profit or loss development are of interest to the auditor. The quality of management as well as investment projects or the current asset and debt situation also play an important role.
Credit rating for companies
In practice, the creditworthiness of a company is measured in scores or ratings. This rating can fluctuate between “very good creditworthiness” and “justifiable creditworthiness” and is usually determined by rating agencies. Creditworthiness is given if the company or the debtor receives a rating that is within the scope of "investment grade".
Effects of credit rating
Of course, it is advisable to carefully check the business conditions for companies with poor credit ratings. Overall, the aim of the credit rating is to determine the debtor's credit risk by means of a rating. For the company concerned, a deterioration in creditworthiness often results in higher refinancing costs, since the loan interest includes a creditworthiness-dependent risk premium. If a company has a good credit rating, the loan rate is usually lower than if it has a bad credit rating. Conversely, companies with poor credit ratings pay higher interest rates.
OK, what if you messed up? How long will it take to clear the debt?
Ironically, the entries on repayment difficulties for loans or insolvency - i.e. those that cause the greatest difficulties with a new loan application - stay in your SCHUFA information the longest. Once you have paid the claim, it will take three years for the entry to be deleted. And the counting of these three years does not start until the end of the year in which you paid off the debt. For example, if you pay an overdue amount in the spring of 2019, the waiting period for deletion does not begin until the turn of the year 2019/20. Three years later, on January 1, 2023, you will then be rid of the entry.
After all: If the creditors report the payment to the SCHUFA, the entry remains. But he already gets a “completion note”. This means that the SCHUFA still remembers that you were once in arrears with a payment. But she also registers that the case is now ticked. Accordingly, your SCHUFA score should rise a little again. Kind of seems unfair if you pay the debt entirely, but O.K.!
Hopefully, you are able to better understand how this impacts your life in this context. It is very different from the way credit works in other countries - the subtle nuances and similar. It is also a myth that having a company or corporation gets you out of having no access to loans and financing - there will always be some elements of private discovery. There’s already a lot to think about when starting a business, outside of actually doing it so best to be informed! As a freelancer and self-employed person, maybe you do not need access to credit, but no matter your situation it’s important to know how the system works!