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What does a bank look at during their risk assessment process
A bank needs to have a risk assessment process during their loan process to protect themselves. They need more assurance, than just a business owner's word, that they will get their money back. The risk assessment process provides a bank with that assurance. Though a risk assessment will not guarantee the money, it does help them better decide if it is more than likely that the business will pay back the money. Risk assessments also help the bank know how much they should lend to the business owner as well as the interest rate that will be on the loan. This article discusses what a bank actually looks at during their risk assessment process. Credit history or credit report When a person is applying for a business loan the bank will look at their credit history or their credit report during the risk assessment. A business' credit history or credit report shows the history of the business' past loans. For example a credit report will show if the company has been able to repay their past loans on time. It will show if they have had any late payments or if they have had to file bankruptcy. Credit score A person's and a business' credit score is computed from the credit history. If the person or business has a poor credit score it means that they do not have a good credit history. It is possible that they have paid their payments late or maybe they do not have much credit history at all. When a credit score is in the 500's it is possible that the business will not get a very good loan if they get a loan at in the first place. This means that the loan may not be for a very large amount of money and/or it will have a high interest rate. The higher a person's or business' credit score is, the better chance the person or business has to get a business loan. Also, when the credit score is higher the person or business will get more money and have a better interest rate on their loan. Income The income of the person and their business is also an important factor during the risk assessment process when they are applying for a business loan at the bank. The higher a business' income the higher their chance of getting a loan, especially for the amount they need. The reason that banks like the person or business to have a pretty good sized income is so they know that if they have the money they are more likely to pay back the loan they got from the bank. When a person is first setting up a business, and they need a loan to do so, they need to have a good business plan. The reason that the person needs a good business plan is to prove to the bank that they have a plan to get income. The bank wants to see that the business will have the money to be able to pay back the loan that they get from the bank.
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