How to Quantify Risk and Creditworthiness
What is a Risk Score, Credit Score, and Credit Rating and how do they differ from one another?
Most people working in the financial services industry, or otherwise exposed to it either as an internal or external stakeholder, would have most likely come across one of these terms one way or another. Whether you are an individual, a startup, a small business owner, or the treasury head of a large entity, chances are that you would have heard of these concepts while applying for credit, equity fundraising, or some sort of an internal risk assessment.
Companies usually assign risk scores to their counterparties, products, and other activities and procedures as part of their internal risk management policies and procedures. Your bank might have told you that you have an excellent credit score making you eligible for a higher credit limit or special offers on its banking products. Or, a company may be unable to raise the required funds (either from the equity or debt markets) or be ineligible to participate in a contract tender in case its corporate/bond credit rating is not good enough.
What we have seen above is the practical usage of the three scores/ratings in the industry. But what exactly do we mean by a good risk score and how does it differ from a good credit…
