Why Should I Care About a Risk Rating?

07 December 2017

If you’ve ever found it difficult to get a loan or negotiate more favourable terms with your bank, including a lower interest rate or fees, your risk grade might be behind it.

A risk rating (also known as risk grading) is what banks use to assess your ability to meet your financial commitments. All banks have a specific set of metrics (also known as risk grade models) they use to rate their customers.

It can be difficult to get visibility on your risk rating but successful businesses make a point of understanding how banks view their risk and use this knowledge to help improve the quality of existing banking relationships. It can also help identify and leverage untapped growth opportunities.

How do banks use my risk rating?

Banks use your risk rating to inform the outcome of all their interactions with you. Your risk rating will determine:

  • If banks will lend for new purchases or business acquisitions
  • The maximum amount of borrowing
  • Your interest rates and fees
  • The terms of your facility, including security and loan repayments
  • Your reporting requirements
  • The outcome of any restructures of current arrangements
  • The outcome of disputes or settlement negotiations.

What do banks measure?

All banks have a specific set of metrics they use to rate their customers based on financial results, debt levels and business behaviours. Typically, banks will consider a combination of:

  • Your past track record of financial performance
  • Quality of management information including budgets and forecasts
  • Current level of equity
  • Current industry dynamics and future trends
  • Debtor and creditor management
  • Management experience
  • Bank history and behaviours
  • Your current ATO position and previous compliance history.

Ultimately the two major factors are how well you can service your debt and the amount of equity available in your business.

BDO’s Debt Advisory team has developed a Financial Health Check that replicates part of the bank’s risk rating process. This is a free information tool that gives you a sample risk score, supported by information to help you become more clued up when dealing with your bank.