In finance, credit reports form a commonly used method to check the creditworthiness of natural persons and companies, as a credit report provides information on their financial situation. In other words, credit rating is connected to personal and commercial creditworthiness - which is forecast on the basis of historic and contemporary data. The credit report is designed to protect companies against the deteriorating payment discipline. Therefore, the assessment of private individuals' and companies' creditworthiness - as well as forwarding of such information in the framework of a credit report - have long become common practice. Justified negative entries cannot simply be deleted from credit rating databases. If, on the other hand, the negative entry is unlawful, private individuals and companies can take legal action. Credit reports are issued by so-called credit rating agencies. These agencies are private companies and are paid by the companies providing credit. Their objective is to protect their contracting partners against credit default. They provide information on loan repayments involving the natural person or legal entity inquired about, the respective income situation, current debts, current loans and expenses, as well as possible assets.
Companies are checked in much greater detail. For example, the credit report starts with free general information that can be obtained from a bank or credit agency. If you need further information in the framework of a credit report, you can use the company's annual financial statement with information on equity ratio, the available cash flow etc. to find out more about profits, sales or possible losses. The annual financial statement also provides information on the entire corporate planning, investment policy and the quality of management. In addition, there are other sources for obtaining a credit report for companies. These include credit agencies, which provide financial information of companies. Here, different information can be obtained during a credit check depending on the level of risk to be covered. For example, the credit agency can provide very basic information about the company's history, its objectives and the relevant industry, about branch offices, shareholdings and real-estate property. In order to be able to assess the financial situation in the framework of a credit report, information on the company's overall financial situation as well as its payment history and negative characteristics, business parameters and balance sheets are also needed.
In the case of managing directors and partners with private liability, freelancers and small traders, so-called scores are calculated to determine their creditworthiness and are forwarded in a credit report. A score provides information on how likely the subject is to be able to pay an invoice. Scores, which are also known as leading indicators, are compared to marks on general conduct to assess the subject's solvency and willingness to pay. Credit reports are provided by credit agencies.
In principle, transactions with higher risk should be checked much more stringently and comprehensively than those with a lower level of risk. In any case, the credit report should be obtained before the service is performed. In the case of business partners or customers with a lower credit rating, the terms on which the transaction is based can be adjusted to the result of the credit report. It is up to the respective creditor to determine which credit rating criteria are assumed and how they are weighted. Credit ratings connected with the credit report are assessed the first time a loan is granted, but also continuously during the term of a loan granted. As a result, credit ratings based on credit rating criteria lead to a rating mark with the aim of determining the respective debtor's current credit risk at various times. The assessment is effected by awarding points which provide information on creditworthiness as well as the assignment to certain rating classes. Positive entries in the framework of a credit report do not only confirm good creditworthiness, but, as a result, they also ensure that potential contracting partners will consider loan applications. Negative entries, on the other hand, have negative effects on loan applications so that the risk of a possible insolvency (also referred to as "bankruptcy" colloquially) in the event of cash flow problems are much higher.