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What is the credit risk?

October 13, 2020

Borrowing money is always accompanied by risks. Both for the entrepreneur who borrows the money and for the lender. The lender runs the risk that he or she can no longer bear the financial burden. And the bank or other lender may have to deal with entrepreneurs who do not pay back the loan. The latter risk falls under the credit risk; the risk that a debtor (= the person who lends the money) can no longer meet the financial obligations, which means that the lender is left with outstanding loans.

How do banks deal with credit risk?

The term credit risk is mainly used in banking and corporate finance . To limit the risk of unpaid loans as much as possible, most banks work with specially designed credit risk information systems. These systems map out the risk of a particular debtor and in this way make an estimate of whether or not someone is eligible for a business loan . Moreover, we work with risk profiles; these are internal rating methods for companies. On the basis of a rating (= assessment) it is determined whether a company falls under the denominator low risk , medium risk or high risk . Healthy, established companies in a stable or growing market receive a high rating and are therefore classified as low risk. But entrepreneurs who are just starting up, companies that have only existed for a few years or start-up companies whose concept has not yet been proven, are assessed with a very critical eye and therefore often fall under the high risk.

The creditworthiness of a company

Before taking out a business loan, the creditworthiness of both the company and the entrepreneur himself is examined. How is the company doing? And can the entrepreneur meet all financial obligations? What do the solvency and liquidity look like? The creditworthiness of the entrepreneur himself plays a major role in determining the risk profile of the company, especially in sole proprietorships and general partnerships (general partnership). Do you want to take out a business loan or business credit ? In that case, keep in mind that the lender may request a BKR test . In addition to building good creditworthiness, collateral plays a major role in taking out a business loan. This includes, for example, the collateral for the loan. But the surety also forms an important security for the lender.

How do I increase my creditworthiness?

The creditworthiness of a company can be improved by creating more financial scope. More income and more assets. First, make sure that all financial obligations are always met on time. Are you behind with your payments? Then this can lead to a negative listing at the BKR. Another way to give the financier more security is to bring in more own money. By increasing the share of equity, you show the lender that you are less dependent on loan capital - in other words, the solvency percentage increases. In addition, it is always important to show positive sales and cash flow figures. To reduce the financing risk per investor, it is important to spread the total financing over various financiers. For example, you can choose to take out a business loan from a bank and collect part through crowdfunding. This prevents you from being (too) dependent on one investor.

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