- Initial Situation
What associations does this trigger for you? You are planning an investment (for example, the purchase of a machine) for your business. The customer payments you had firmly budgeted for fail to arrive in your bank account. You approach the account manager at your principal bank, request a loan or an extension of the current account credit line, and submit your balance sheet together with the current BWA (business management report) and SuSa (trial balance). The credit specialist has questions. He may even express doubts. A refusal is possible.
2. General Remarks
The objective of the rating is to assess all relevant operating and functional areas of the company under review with regard to its economic situation and its likely development, and furthermore to identify and evaluate its creditworthiness and the associated risks.
Given the multitude of available information, the rating thus serves third parties — such as investors or banks — in determining debtor creditworthiness and default probabilities, and enables the categorisation and minimisation of credit risks in particular.
A good rating grade is not only a prerequisite for obtaining credit, but also for an acceptable interest rate. The interest-rate spread between a “good” and a “poor” grade amounts to more than 4 percentage points at the KfW (Kreditanstalt für Wiederaufbau). At local principal banks, the spread can likewise reach up to 4 percentage points.
The general rating procedure is carried out in individual process steps:
• Classification of insolvency risks into risk categories • Representation of insolvency risks by means of key figures • Linking the key figures into a key figure system • Forming a risk assessment by reviewing and evaluating the values of the key figures • Development of measures in line with the resulting rating outcome
3. Areas of Optimisation in the Rating
The selected measures we present within the framework of balance sheet policy can positively influence the rating assessment. The overview therefore illustrates how these measures affect the balance sheet items and the rating key figures derived from them by the banks.
The most important areas to address in order to improve the balance sheet are:
• Increasing equity • Strengthening earnings power • Reducing debt, and • Securing liquidity
Building on this, ten effective measures are available to achieve a positive effect when a rating grade is assigned:
• Improve the equity ratio • Reduce inventories • Reduce receivables • Optimise the financial structure, in terms of working capital and asset coverage • Adjust loan maturities, in terms of cash flow and debt service capacity • Increase profitability • Reduce indebtedness • Minimise fixed assets • Increase cash flow • Optimise communication with providers of capital
These individual measures can be addressed in a targeted manner by you together with our specialists and implemented effectively, swiftly and without complication.
4. Conclusion
The rating grade is not a rigid, fixed or unalterable figure. With appropriate forward-looking balance sheet policy and rating-oriented corporate management, any management team can positively influence its company’s own rating grade.
Please feel free to contact us so that we may assist you in developing the effective measures that are material for you and your company in improving your rating.
Frequently asked questions
Frequently asked questions
What is the purpose of a rating for companies?
A rating assesses all relevant performance and functional areas of a company with regard to its economic situation and expected development. It enables third parties such as banks or investors to evaluate the debtor's creditworthiness and probability of default. This allows credit risks to be categorized and minimized.
What impact does the rating grade have on loan terms?
A good rating grade is not only a prerequisite for obtaining credit but also determines the interest rate. At KfW as well as at local house banks, the interest rate spread between a good and a poor grade can be up to 4 percentage points.
Which areas of the balance sheet are particularly important for improving a rating?
As part of balance sheet policy, four key areas should be optimized: strengthening equity, increasing earnings power, reducing debt, and ensuring liquidity. These levers directly impact the rating metrics derived by banks.
Which specific measures improve a company's rating score?
Effective measures include strengthening the equity ratio, reducing inventories and receivables, optimizing the financial structure (working capital, asset coverage), aligning loan maturities with debt service capacity, increasing profitability and cash flow, and minimizing fixed assets. In addition, communication with lenders and investors should be managed proactively.
How does the rating process work methodically?
The rating process is typically structured in several steps: classifying insolvency risks into risk categories, representing these risks through key performance indicators, linking the indicators into a coherent system, forming a risk assessment by evaluating the indicator values, and finally developing appropriate measures based on the outcome.