Assessment of the creditworthiness
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Basel II
In January 2007, the new international agreement on the capital requirements of banks, also known as Basel 2, entered into force.
Banks will have to classify their customers according to their riskiness, through increasingly sophisticated rating procedures. Rating means literally “rating”. For companies, therefore, it means an objective vote on credit capacity, on solvency and budgetary soundness.
Therefore, companies have a lot to work on to avoid being unprepared for the appointment with the rating. They will not only have to work to improve their financial and asset structure, but also the quantity, quality and timeliness of information to the outside.
The cost of money will obviously be at risk, that is, the best companies will have the cost of the lowest money and the least good companies the highest. The banks will have to entrust the enterprises not more in reference to parameters like the turnover but in base to the real capital, that is to the equity (patrimony) effectively possessed. But in a system of small and medium-sized enterprises generally undercapitalized – and therefore indebted – like the Italian one, it is difficult to hypothesize which ratings the banks will have to apply.
If companies want to work with banks, they will have to adapt and one of the first steps will be recapitalisation. The company financing will have to occupy a prominent place in the attention of entrepreneurs, whether the issue is addressed internally, or is entrusted to specialist advice outside the company.
The sensitive areas that must be taken into account during the company check-up, in order to take the bank rating exam, may be the following:
- Asset structure of the company: the balance sheets of many SMEs present totally loss-making capital structures, which in no way show the real value of the company; not intervening in this area will be a real self-interestgoal; it will be rather to evaluate the less expensive interventions.
- Financial situation: the debt structure (short-term debt/ medium-long-term debt ratio) will have to be analysed; the debt ratio / own funds ratio will have to be analysed; the loan/ use ratio; the plurality and type of credit institutions that entrust the company.
- Economic aspects: the profitability of the company expressed by the budget can not be just a function of attention to tax issues.
Consequently, planning future commitments in order to find the appropriate financial cover in time must also be an imperative for smaller companies, in order to avoid running into situations of tension that will be immediately taken over by the banks.
Any choice in the financial field will have to be evaluated with reference to the different impacts it will have on the business management as a whole.
For example, deciding whether to acquire an asset with a mortgage or a lease will be a choice that can no longer be made only in view of tax advantages, but also the impact of this choice on the capital structure of the company and on the debt structure.
For medium and lower quality companies, the rating determined by the banks will become a strategic variable to regulate the cost and efficiency of their choices of financial structure and financing of investments, and a tool for assessing the opportunities for growth and diversification.
Each company will necessarily have to make a prior assessment of its credit capacity and determine which financial areas need to be optimized before recourse to credit.
Small, highly imbalanced companies could be particularly affected by banks adopting advanced approaches. There will not only be threats to SMEs but also opportunities, as well-balanced, transparent and highly reliable SMEs will have much to gain from the new system.
In order to avoid paying higher interest rates, SMEs will have to present themselves in the best possible way to the banks and in particular will have to pay attention to the following variables:
- Information on the sector
- Analysis of competitive positioning
- Investment plans
- Financial statements and cash production capacity
- Indicators of financial equilibrium
- Business plan, and sustainability of development etc.
In addition, it will be crucial to choose very carefully the bank with which it is most convenient to work within a more collaborative and transparent relationship.
Our know-how at your disposal
LSA Finance & Consulting S.r.l. has as its maximum objective the peculiarity of the management of transactions between banks and companies. The primary aim will be to facilitate the relationship between bank and company, making available to our customers a know-how, which will allow them a painless ferry to the new rules of access to credit.
We believe that in order to minimise future difficulties in access to credit, self-assessment according to typical rating fees is the key tool to prepare the company for the impact of Basel 2.
LSA Finance & Consulting S.r.l. is ready to assist customers globally through a methodology, consisting of a set of self-assessment and guidance tools, which will allow companies to understand how they are seen by banks, so as to identify the critical aspects of their situation in order to define in time the strategies and target values to be achieved.