Bank credit rating is a financial-mathematical method used to assess a borrower’s creditworthiness. Rating agencies and credit institutions determine the creditworthiness of bank clients through various types of ratings. While only a few criteria are applied to private individuals, the rating process for corporate clients is more complex. Companies can prepare for bank credit rating and take several measures to achieve a good assessment.
Basel II Defines the Requirements
As a result of the international financial crisis, the Basel Committee on Banking Supervision issued new capital requirements for banks and other financial institutions. These regulations are known as Basel II. The stricter requirements impact lending to companies. Banks must assess the credit default risk of loans to corporate clients, either through a rating agency or independently. Therefore, companies must disclose certain documents if they wish to borrow money from a credit institution. Without these documents, a bank cannot decide whether to grant a loan to a company. The financing terms also depend on the submitted documents.
The Different Types of Ratings
The primary distinction among the various types of ratings lies in who performs the assessment of a company. For an external rating, a company commissions a rating agency. The agency not only considers the key figures of the examined company but also assesses its management and future prospects. The client is informed of the result. The company can decide to publish it and present the external assessment to the bank.
In an internal rating, the credit institution undertakes the assessment. Typically, borrowers do not receive specific results of the internal examination. In a fast-track procedure, the bank uses only the borrower’s account turnovers as a basis. For a balance sheet rating, credit institutions require the submission of annual financial statements, management must answer a questionnaire, and the bank evaluates the company account management.
Thorough Preparation for the Bank Meeting is Crucial
If a corporate loan is to be decided based on a balance sheet rating, the management of a company must prepare thoroughly for the bank appointment. Each bank sets its own standards according to which it conducts the rating. The submitted documents should be current, complete, and truthful. The bank requires the monthly business analyses (BWA), as well as the annual financial statements for the last two years, management’s planning calculations, and statements regarding the company’s future strategy. It is the borrower’s responsibility to compile, update, and provide these documents to the credit institution in a timely manner.
These are the Details Banks Focus On
Companies must be prepared to provide precise information on these key figures:
- Equity ratio and return on equity
- Debt capital
- Liquidity
- Inventory
- Depreciation
- Revenues and return on sales
- Changes in inventory
- Own work capitalized
- Liabilities
- Cash flow
- Operating result
When reviewing the submitted documents, credit institutions pay attention to who prepared them and whether the presented figures are plausible and comprehensible. Business owners must be prepared to provide detailed information about current operations and future plans. Issues with staff or customers unwilling to pay must also be addressed openly to obtain a loan from the bank.
How Companies Achieve a High Rating
Companies can actively contribute to achieving a high rating. Before the meeting with the bank, the managing director should inform themselves about the company’s current figures. Business owners who are unfamiliar with balance sheet key figures and ratings should be accompanied by their accountant or tax advisor. At some credit institutions, two employees independently assess the bank’s corporate clients. During personal discussions between bank employees and a company’s management, consistent statements should be made. The management of the company account is also a crucial criterion for the rating. Therefore, the overdraft facility should not be exceeded.
What has been your experience with ratings? We look forward to your comment.
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