One of the key drivers of many financial institution's long-term profitability is effective risk management, and one of the most significant components of overall risk is the credit risk associated with their loan portfolios. The higher the risk of loan loss, the more capital they must allocate to cover the credit risk and the higher the yield on the loan must be. One way to estimate the degree of risk and, therefore, the amount of capital required, is to measure the risk in each of their loan portfolios.
Financial institutions typically measure the relative risk by means of a risk rating system. A borrower's risk rating represents the financial institutions assessment of the borrower's ability to contractually perform despite adverse economic conditions or the occurrence of unexpected events.
Maintaining a solid corporate credit rating is vital to the ongoing success of any company. Poor commercial credit scores can result in denials for future loans, higher interest rates and reduced ability to work with vendors in the marketplace. This can significantly hamper efforts to compete effectively and may even lead to further credit difficulties in future transactions. In most cases, obtaining credit for commercial business needs is a vital part of the overall business plan, so protecting that ability is of paramount importance in the competitive marketplace.
Paying on time is one element of the overall credit rating. Companies that manage their cash flow effectively can make prompt payments to suppliers and vendors. This can boost the company's overall credit rating and provide a solid basis for growth. Another factor is the degree of debt already in existence. While maintaining a few unused or little-used lines of credit typically does not negatively affect the credit ratings of healthy businesses, large sums of debt relative to the corporate assets can prove costly and may limit opportunities in the commercial credit marketplace. Rather than taking on new debt, paying down existing debt can sometimes be a solid strategy that will produce financial benefits in the future. Finally, maintaining too many open lines of credit can make a negative impression on some lenders. While these financial resources are useful tools in cash flow management, they can also represent untapped debt potential that may limit additional opportunities for credit for commercial business needs.
CNF Exchange can provide borrowers with an exclusive venue for their commercial credit applications that will directly connect borrowers with lenders. By using the CNF Exchange system to identify the right credit opportunities, businesses of all sizes can find the right solution to manage ongoing cash flow and commercial credit needs.