Do you need a loan? Then you have to convince potential lenders of your creditworthiness, i.e. your creditworthiness. In concrete terms, this means that you must prove both the ability and the willingness to be able to pay the future interest and repayment charges on time and in full. So much for the theory. But how does the bank want to know whether a company can and wants to repay the borrowed money?
In the first part of this article, I will explain the basic principles of credit assessment so that you can derive suitable measures for your very personal situation. In the second part, I give concrete tips with which you can quickly improve your company credit.
Rating and creditworthiness
With the help of complicated mathematical-statistical rating procedures, banks evaluate and weigh various corporate factors that experience has shown have a significant influence on whether a company becomes insolvent in the future or not. At the end of the rating process, an overall score is determined. From this note, it can be seen how high the statistical risk is that a company can not repay the loan including interest or not in full. The rating thus expresses the statistical probability of default of a loan. The worse the rating result, the higher the risk for the bank and the more expensive the loan.
Although the rating procedures of the individual banking groups differ in detail, they are largely identical in their basic structure and are based on the following three rating areas.
7 Measures to improve corporate creditworthiness
For a better credit rating and thus easier access to the loan, you can do a lot yourself like getting verified NET 30 accounts. By using the measures presented below, you can contribute to a better rating relatively quickly.
1. Account management
It should be self-evident that the bank accounts are kept within the granted credit lines and that there are no overdrafts. If these cannot be avoided in exceptional cases, they should at least be discussed in advance with the responsible customer advisors. This also includes a concept of how and by when the overdraft is returned.
In principle, current account credit lines should only be used to a maximum of 70% – 80% so that they have the necessary “air to breathe”. This not only has a positive effect on the rating result but also gives you the necessary freedom for unforeseen expenses. Forward-looking liquidity planning, i.e. the comparison of expected deposits and withdrawals, effectively supports you in account management. If it becomes apparent that the credit lines are becoming too narrow, you still have enough time to act and look for suitable financing options. What else you can do when money is tight, you can read here.
2. Corporate management
Without plausible sales and earnings planning for the next two to three financial years, you as an entrepreneur no longer need to enter into credit negotiations. Meanwhile, the general rule is: Without control, no credit. At the latest when comparing the planned figures with the actual figures achieved, it becomes clear what your plans are actually worth. Of course, the actual figures will never exactly match the planned figures, and no one expects that. The main thing is that the direction is right.
You should pay particular attention to the figures from accounting during the year, i.e. the BWA (Business Evaluation). They often don’t have much to do with the reality of the company. Therefore, it is advisable that you explain these figures as far as necessary. You can find out more about how to properly prepare the BWA for the bank here.
Simply because of corresponding legal regulations, banks want to be regularly informed about the economic development of their borrowers. For this purpose, the current annual financial statements must be presented on an ongoing basis, and the current BWAs at least quarterly during the year. Submit these documents on your own initiative without having to be asked to do so each time.
However, you should not stop there: If you have already created planned calculations, it makes sense to continuously compare the planned figures with the actual figures actually achieved and, in the event of deviations, explain the reasons for this and show appropriate countermeasures in order to get back on track. Also, pass these documents on to your bank.
Let the bank look behind your figures: What is the reason that, for example, personnel costs have increased disproportionately, and why were inventories particularly high at the last balance sheet date,… Such an open and transparent information policy strengthens the relationship of trust and conviction in your competencies as a business leader. And this has an immediate positive effect on the assessment of the qualitative company factors and thus on your rating.
In everyday business life, not everything always runs smoothly, that’s quite normal. Whether the promising new product does not sell as well on the market as expected, whether you lose money because a previously good customer suddenly can no longer pay or whether there are problems with your own quality management and customers do not accept the ordered goods due to defects. The problems at the bank will come to light at the latest with the next annual financial statements.
Experienced analysts recognize the signs of this from the figures and follow up. But if you have talked to the bank about it in advance and pointed out possible solutions, it is much easier to get the necessary loans to get over the problems. If you only report when there is already a fire under the roof, it will be difficult to get money. Apart from that, with an open information policy, the bank can rely on the fact that it learns about possible problems at an early stage and does not have to expect nasty surprises. This has a positive effect on the rating.
When you buy goods or pay wages and salaries, they get the money invested back relatively quickly through the sale of their products. The situation is different when you buy machines and systems. The machine should not be sold but used in the long term. The invested money is only gradually earned again over a long period of time. With a short-term maturity of the financing, there would not be enough money in the cash register to be able to repay the loan.
If you get no or only a much more expensive follow-up financing when the loan matures, your company has an existential problem. For this reason, liquidity ratios also have a significant influence on the rating result. Therefore, the equity plus the long-term debt on the liabilities side of the balance sheet should be at least as high as the fixed assets on the assets side, better a little higher.
Talk to your bank at an early stage if your company has this key figure of less than 1, i.e. part of the fixed assets, financed in the short term. As a rule, the bank is open to refinancing part of the short-term loans into long-term loans. In difficult cases, there is also support from the promotional banks, for example, the acute loan from the LfA Förderbank Bayern. If necessary, the promotional banks relieve the house banks of part of the credit risk, which facilitates financing.
6. Financial requirements
Talk to your bank in good time if you are planning investments or if you are planning to pre-finance larger orders and projects. If you only inform the bank about the increased financing requirements when the bills are already in the house, problems can hardly be avoided.
Even if an additional loan in and of itself is not a problem, experience has shown that it takes weeks until you can actually dispose of the money. The documents must be checked and prepared internally for the decision-makers, the application must be ordered by the committees, collateral must be ordered and the entire contract must be regulated.
In the meantime, the bills are long overdue. Either you put off your suppliers, which has a negative effect on your information, or you strain the current account credit lines and the red warning light lights up.
Apart from that, this procedure arouses the suspicion that you are acting haphazardly. And this is not a good prerequisite for placing trust in your management competence.
7. Equity and equity ratio
Equity is available to the company in the long term and, in the event of corporate insolvency, can only be withdrawn from the company when all other creditors have received their money back. Equity gives the company stability. Therefore, the equity ratio, i.e. the ratio of equity to the total assets of the company, is one of the most important indicators when assessing quantitative business factors.
The three most important measures with which you can quickly improve the equity ratio of your company, I have explained here.
The rating result – and thus the credit rating of a company – is neither exclusively dependent on the company figures nor are you as an entrepreneur without any influence. Even when presenting the company’s figures, you have room for maneuver by contractually designing cash deposits accordingly and adapting the term of the financing to that of the financed assets. Or reduce the balance sheet total by means of leasing or factoring, which increases the equity ratio.
The numbers alone do not decide whether you get credit or not. As an entrepreneur, it is up to you to create the basis of trust at the bank so that your company will continue to be successful in the future. And the measures outlined offer a good basis for this.