Most bank pricing strategies are directly linked to a risk grade process and once you know how these work, it is reasonably easy to change behaviour to enhance your risk grade and reduce borrowing costs over time.
A banks risk grade process assesses each business customer and ranks them based on an expectation of the probability of the business defaulting on its loan, and if it defaults, the probability of the bank losing money.
Whilst no bank risk grade model is the same, the key ingredients are fairly predictable and can be broken up into 3 categories:
- Account Performance
- Financial Performance
- Customer and Industry Information