Credit Risk and Credit Rating
In today’s challenging business environment, it is very crucial for financial institutions to do risk assessment. Therefore, it is very important to know exactly what Credit Risk is and why it is important to ascertain it. Due to credit crunch in the past few years many companies have started to look closely at credit risk. Credit companies and their traditional lenders have had to completely overhaul their lending policies as well as taking a closer look at credit risk.
When talking about credit risk we see that it evolved only when businesses use debt as a part of their capital structure. Depending on what type of a loan financial institutions are giving or being considered for will depend on the amount of risk that is being entered into. For example if a lender is giving a secured loan, the amount of risk will be minimal due to the fact that the loan is secured by some collateral. However if the loan is unsecured with no collateral involved the risk will be greater.
There are companies who specialize in assessing how much risk is involved with the lending process. These companies will go through every aspect of a company’s credit history to assess the risk and will let the lender know what kind of risk they are looking at when considering loaning to that business.
It is very important for a company to take special care of their credit score and credit history. Their credit history and score are looked at every time when a business apply for any funding or non-funding facility. Lenders do not want to lend money to a business who has a poor credit score and some lenders will not even consider lending to those who have late payments, slow pays, bankruptcy or charge offs.
There are other advantages to taking care of credit rating. For example, lenders will be more willing to give good interest rates when business have a good credit score. Usually the higher the credit score is the lower interest rate will be charged. Without a good credit history and credit score, company will find difficulty because they are not able to obtain a large amount of cash for your loan also they will have to bear high interest rates. It pays to have a good credit rating.