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How Enterprise Risk Management Affects Credit Ratings

A strong risk management program can improve credit ratings, and in turn make it easier for businesses to secure favorable borrowing terms and interest rates. That could save your company millions of dollars in interest over the life of a loan and significantly reduce your expenses. Here’s how.

What are credit ratings and credit scores?

A credit rating describes the creditworthiness of a company. Credit ratings are usually shown as a letter.

A credit score is another measure of creditworthiness that may be used for businesses or individuals. It is typically shown as a number on a 0-100 scale.

Both credit ratings and credit scores tell potential investors how likely a company is to pay back their debt and, in a broader sense, how risky it is to invest in your company.

Why is your business’ credit rating and credit score important?

Banks and investors pay close attention to credit ratings and scores when deciding whether to lend money or do business with a particular company.

For example, a lender might check a water utility’s credit rating when considering an application to refinance a loan. Or, a parts supplier might check the credit score of an electronics manufacturer before signing a contract.

In the same way that a good personal credit score helps you secure a lower mortgage interest rate, a good business credit rating makes it easier to secure favorable borrowing terms and interest rates. On the flip side, a poor rating can make it difficult to secure the cash needed to grow your business.

It might not seem like much, but simply reducing your interest rates could save your company millions of dollars over the life of a loan. That’s especially important for capital-intensive industries, such as utilities and manufacturing.

How does enterprise risk management affect credit ratings and scores?

Before lending you money, potential creditors want to know how well your company is prepared to respond to potential risks that threaten to sink your business. No surprise there.

A mature risk management program signals to lenders and investors that your organization is likely to survive an unexpected setback and stay in business. Along the same lines, a poor or nonexistent risk management program is a red flag that your organization lacks resilience.

As a result, enterprise risk management is an important factor in credit calculations. All three of the major firms that issue credit ratings — S&P, Moody's, and Fitch — now consider enterprise risk management as part of their analysis.

If you don’t have a formal risk management strategy in place yet, don’t despair. According to Steve Dreyer, the Head of Investor Communications — Americas at S&P Global Ratings, less than half of the companies they rated earned a strong or satisfactory score. In other words, even a small improvement to your internal processes and governance can have an impact on your standing in the eyes of credit agencies.

For one, organizations need to do a better job of identifying and measuring their risks. Many organizations use a risk scoring system to quantify the severity and likelihood of certain hazards. These scores give your company a common language to talk about risks.

Once these risks have been identified, organizations must be more effective in communicating them to senior leaders and to different business units. That means centralizing and standardizing the way your organization collects and reports on risk information. It also means leveraging business intelligence tools such as dashboards to analyze information and make data-driven decisions based on risk. Finally, it means equipping your team with the right tools — including risk management software and mobile apps.

If you’re trying to save money on interest costs and reduce expenses, a strong risk management program could be the key to getting there.

Next, learn how risk management can help lower insurance costs.

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