Initial Situation
What associations might the following example evoke for you?
You are planning an investment (for example, the purchase of a machine) for your company. A firmly scheduled customer payment does not arrive in your bank account. You contact the case officer at your main bank, request a loan or an extension of your current account credit line, and submit your balance sheet together with the current BWA (business management evaluation) and SuSa (trial balance).
However, the credit expert has questions regarding your figures. They may even raise doubts, and your credit request may ultimately be declined.
The question arises as to why the credit decision turned out negative.
General Information
The objective of the rating is, on the one hand, to present all relevant performance and functional areas of the company being analysed with regard to its economic situation and its likely development, and, on the other hand, to assess and identify the company's creditworthiness and its potential risks.
Given the wide range of information available, the rating thus serves third parties, for example investors or banks, as an instrument for determining debtor creditworthiness and default probabilities, as well as for categorising and minimising credit risks in particular.
A good rating score is not only a prerequisite for being granted a loan, but also for obtaining an acceptable interest rate. The interest spread between a "good" and a "poor" score at the KfW (Kreditanstalt für Wiederaufbau) amounts to more than 4 percentage points. At local main banks, the spread can range from 1.5–5.4%, or even up to an individual figure of 8%.
The general rating procedure follows 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 verdict.
Areas for Optimisation in the Rating Process
In order to secure your company's future, preparatory measures should be taken.
The selected measures we present within the framework of balance sheet policy can positively influence the rating assessment. The tabular overview below illustrates how these measures affect balance sheet items and the rating key figures derived from them by banks, either positively or negatively.
In our view, the most important areas to address when improving the balance sheet include, for example:
- Increasing equity
- Strengthening earning power
- Reducing debt, and
- Securing liquidity
Building on this, ten effective measures can be applied to achieve a positive effect on the rating score:
- Improve the equity ratio
- Reduce inventories
- Reduce receivables
- Optimise the financial structure, in terms of working capital and asset coverage
- Adjust loan terms, in terms of cash flow and debt service capacity
- Increase profitability
- Reduce debt
- Minimise fixed assets
- Increase cash flow
- Optimise communication with capital providers
These individual measures can be addressed specifically by you together with our specialists and implemented effectively, quickly, and without complication.
Conclusion
The rating score is not a rigid, fixed, or uninfluenceable figure. With appropriately forward-looking balance sheet policy and rating-oriented corporate management, every management team can positively influence its company's rating score.
We encourage you to also seek direct contact with your main bank; your bank case officer can not only inform you of your rating score, but can also provide targeted feedback on how to individually improve your assessment. We are also glad to meet with your main bank together with you in advance.
Please contact us so that we can – together with you – identify, develop, and implement the most effective measures relevant to improving your company's rating.
Tabular Overview
Frequently asked questions
Frequently asked questions
What is the purpose of a bank rating for companies?
A rating assesses a company's economic situation and expected development, as well as its creditworthiness and potential risks. For banks and investors, it serves as a tool to determine debtor credit quality, default probabilities, and to minimize lending risks. The outcome significantly influences whether a loan is granted and on what terms.
How strongly does the rating grade affect the loan interest rate?
The rating grade has a significant impact on interest conditions. At KfW, the interest rate spread between a good and a poor grade exceeds 4 percentage points. At local house banks, the spread can range between 1.5% and 5.4%, and in individual cases even up to 8%.
Which process steps does a rating go through?
First, insolvency risks are classified into risk categories and represented using key performance indicators. The indicators are then combined into a KPI system and condensed into a risk assessment by reviewing their values. Based on this assessment, targeted measures for improvement are developed.
Which areas of the balance sheet should be the focus for improving the rating?
Key levers are increasing equity, boosting earning power, reducing debt, and securing liquidity. Forward-looking balance sheet management in these areas has a direct impact on the rating metrics used by banks.
Which specific measures improve a company's rating score?
Particularly effective measures include improving the equity ratio, reducing inventories and receivables, and optimizing the financial structure (working capital, asset coverage). Further actions include adjusting loan maturities, increasing profitability, reducing debt and fixed assets, boosting cash flow, and optimizing communication with capital providers.
Is a company's rating score permanently fixed?
No, the rating score is not a rigid figure. Through rating-oriented corporate management and targeted balance sheet measures, management can actively influence the outcome. A direct dialogue with the bank representative helps identify specific areas for improvement.