Influencing your risk grade

How you can influence your risk grade


Local Business Feature
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Last time in this column we touched on how banks are required to risk grade borrowers and that higher risk means more capital is set aside to cover potential losses, resulting in a higher interest rate being charged.

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Last time in this column we touched on how banks are required to risk grade borrowers and that higher risk means more capital is set aside to cover potential losses, resulting in a higher interest rate being charged.

The AAA+ Financial Solution team: Paul Hautaniemi, Ashley Evans, Aydn O’Neill, Giules Busato, Aimee Cantarella, Mark Bloxsom and Graham Milliken (seated) look forward to seeing you at Ag-Grow in Emerald.

The AAA+ Financial Solution team: Paul Hautaniemi, Ashley Evans, Aydn O’Neill, Giules Busato, Aimee Cantarella, Mark Bloxsom and Graham Milliken (seated) look forward to seeing you at Ag-Grow in Emerald.

But how are risk grades determined and can you do anything to lower your assessed risk to the bank to achieve a lower interest rate?

Banks are permitted to develop their own risk models based on Australian Prudential Regulation Authority guidelines. This can explain why different banks may offer you different borrowing interest rates.

Generally speaking, the business information that is considered for risk grade / loan pricing assessment includes behavioural, qualitative and financial. We will only touch on a few examples of each here.

Behavioural aspects: How long you’ve been a customer; history of arrears in interest payments; is review material provided on time; is there a history of going over your overdraft limit?

A diligent borrower who manages their account and contacts the bank to arrange a temporary increase in overdraft limit (as opposed to the account slipping into unarranged excess) will lower assessed risk.

If the answer is no to the question “is review material provided on time?” this will increase assessed risk.

Qualitative aspects: Your industry and the outlook for that industry; your years of experience; your standing within that industry; your relationship with customers and suppliers; your exposure to a single supplier for major inputs; if you have access to more than one market for your product; understanding and mitigating your business risks. Good ratings on these questions help lower your assessed risk.

Financial aspects: Past trading results (profits score better than losses); gearing, loan to valuation ratio, net worth; quality of cash flows, ability to meet interest payments and repay debt; if expenses are in line with similar operations.

Statistics show that businesses with higher gearing and lower ability to repay debt etc are more likely to fail. Financial aspects therefore, are heavily weighted in risk grade assessments

You may not think that you can influence financial aspects, but things such as gearing levels are determined by the decisions you make. You determine the quality of financial information provided to a bank e.g. the reliability of cash flows.

Any of the above aspects that you are able to influence on the positive side will work to lower your assessed risk, which should translate to a lower borrowing cost.

If you’re attending the Ag-Grow Emerald Field Days, come and say g’day to the AAA+ Financial Solutions team during the event.

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