20 Tools for Business Owners & CFOs to Better Manage Risk

Ever wondered how to transform your company into a low-risk, high-reward investment? I've got you covered.

I'm deciphering the implications behind the bank's risk assessment and offering business owners and CFOs 20 risk parameters to get loans approved - easily.

In this issue, you will learn about risk assessments and:

1. What it accomplishes for the business
2. How it impacts businesses seeking financing
3. The 20 risk parameters that banks use to determine their lending appetite

What do risk rating assessments accomplish?

In short, risk rating assessments determine the overall credit risk of a company.

On a scale of 1 to 10, the lowest risk gets a score of 1 and the highest risk gets a score of 10.

The risk assessment is broken down into two components - quantitative risk and qualitative risk.

Each component tests for risk parameters that is specific to the industry in which the company operates.

Companies should always aim to fall within the low end of the risk spectrum. Being classified as high risk has consequences that dramatically change the bank's lending appetite.

Let's keep going.

How does risk rating impact businesses?

When your company applies for a bank loan, the bank's first step is to run your financial statements through their risk rating model. By determining risk appetite at the beginning the transaction, this will factor into every decision within the loan application process.

Banks are risk averse. Inherently so, banks prefer to lend money to less risky companies. Lower risk means lower default rates, lower write offs, and most importantly, higher profits.

So when the loan application is submitted for adjudication, the first data point the adjudicator sees is the company's risk rating. This is precisely where first impressions matter because a bad impression makes the deal significantly harder to approve.

But that's not all. There are many other financing terms impacted by risk rating.

For example, a company with low risk would benefit from:

• Lower interest rates ➡️ Lower interest expense ➡️ Higher profits
• Higher advance rates ➡️ More money available to borrow
• Longer tenor on term loans ➡️ Reduces principal repayment obligations ➡️ More cash for growth
• Relaxed financial covenants ➡️ More flexibility
• Less frequent financial reporting ➡️ Saves time and administration
• Increased bank willingness to lend more money ➡️ Easier negotiation for favorable terms
• Easier application process with fewer questions asked ➡️ Easier approval process

On the other hand, the opposite is true for high risk companies.

By now, it should be obvious that every company wants to be classified as low risk.

To get there, let's dive into the parameters that determine your company's risk rating.

10 Quantitative Risk Parameters:

Now, let's get into the meat of the testing parameters.

The quantitative parameters below test the company based on its growth, profitability, leverage, and efficiency metrics.

10 Quantitative Risk Parameters:

Moving onto the qualitative aspect of risk management.

Conclusion:

Now that you are armed with the top quantitative and qualitative risk parameters used by banks everyday, here are the key takeaways:

1. By understanding risk parameters used by banks, you can apply these parameters to your business management practices to minimize against such risks.
2. Reducing credit risk means the company can take advantage of lower interest rates, easier access to bank loans, and a stress-free approach to build towards the future.

So what are you waiting for?

Time to apply these risk rating tips to propel your company toward lasting success.

Side note: Stay tuned as I will be rolling out risk rating assessment templates in the coming weeks.

That's it for this week. See you next Saturday.

Cheers!

Thank you for reading Financing Journey. I hope you've enjoyed this issue.

If you think this would be helpful to anyone you know, please share this newsletter and connect with me on X and LinkedIn for daily financing tips.

Have a topic you'd like me to cover? Email me at hello@lawrencefan.com.