Article

08.02.2016

How does your credit rating influence your credit application?

The bank expresses the creditworthiness of your company in the form of a rating. What is this based on and what factors affect it?

A credit rating is a statistical forecast of the risk of a borrower encountering failure within a year. It is based on both quantitative (historical) and qualitative information. It is essentially a summary of the borrower's current risk profile. A rating is in itself not a final judgement on the viability of a new credit line, but rather serves as an aid for the credit decision-makers.

Margin

When a bank offers a credit facility, it will want to maintain a credit margin in keeping with the borrower's risk profile. In this sense, the rating helps to decide the cost of a loan. For a business with a limited risk profile (and a better rating), the bank will be willing to accept a lower credit margin than for a business with a high risk profile. It goes without saying that the rating is only one of the factors that influence the price point, together with the question of whether security is provided and the existing relationship with the borrower.

Statistical model

The rating is calculated on the basis of a purely statistical model that takes a large number of variables into account. These may be internal factors (such as the number of overdrafts or turnover on accounts held with the bank) or external factors (such as the timeliness of National Social Security Office (NSSO) payments).

Each bank has its own credit rating models (given that the internal factors vary from bank to bank), so there is no universal system. This means that specific variables and how they are weighted in the calculation may considerably differ. It is, however, safe to assume that the following criteria will have an impact on the credit rating of your business:

Factors with a positive impact on your credit rating

  • Your business has sufficient profitability and/or ability to meet the repayments.
  • Your business optimises its management of customers, suppliers, stocks and working capital requirements.
  • Your business strengthens its capital structure and financial health.
  • You provide quantitative and qualitative information on the business, especially on factors that may influence its financial situation.

Factors with a negative impact on the credit rating

  • Careless errors, forgetfulness and practices that may point to suboptimal general management or a worsening financial situation.
  • Authorised and unauthorised overdrafts at your bank(s).
  • The capital structure of your business is weakening.

The business has made an application under the Continuity of Businesses Act (Wet betreffende de continuïteit van de ondernemingen / Loi relative à la continuité des entreprises) or is in liquidation.

Want to know more about your credit rating?

Take a look at www.financieringvanondernemingen.be - www.financementdesentreprises.be.

Article

08.02.2016

How does the bank assess a credit application?

Before providing credit, the bank needs to have confidence in you as a creditor and the project to be financed.

There are five important factors in assessing a credit application:

1. Confidence in the borrower and the business plans

First and foremost, the bank will want to make a clear assessment of the risk of non-repayment of existing and new lines of credit. To make a balanced appraisal, it will therefore want to find out about any aspects of the company that might either support or jeopardise its continued existence.

Most banks express the risk profile of a company in the form of a credit rating. They use specific internal statistical models to measure:

  • Qualitative aspects: the experience of directors and management (because they play a key role in the business), the quality of how the activities are managed (e.g. production, accounts, audits, etc.), diversification in the customer base, the products and services, the suppliers, etc.
  • Quantitative aspects: the liquidity, solvency and profitability of the borrower, use of existing credit lines, etc.

How can you anticipate?

  • You should present your company in detail so that your relationship manager gains a clear understanding of the business activities, the inherent business risks and any ways to mitigate these risks. Be as complete as possible. Otherwise your relationship manager will have to ask for additional information and the decision-making process will take more time.
  • By bearing some of the risk yourself in proportion to the credit required. If you contribute a portion of the required finance yourself, the financial burden and risks are shared more evenly between yourself, as the borrower, and the bank. Furthermore, it also demonstrates your belief in your business and the project to be financed; this will only benefit your application's chances of success. There is no fixed formula for how much risk you should bear yourself. The higher the bank assesses the risk, the greater the contribution the bank will expect from you.

These points are especially important when embarking on new credit relationships in order to build mutual trust. But even when you already have a good credit relationship with your bank, these points still benefit the continuation of that trust.

2. Clear credit purpose

The bank expects to have a clear understanding of the planned use of the new credit finance.

How can you anticipate?

  • Don't just mention the reasons for and benefits of the investment project, also describe the risks and the impact on the current business operations.
  • Indicate when you expect a credit decision from the bank and when you would need the funds.

3. Sufficient ability to meet the repayments

The bank will want to assess the future ability of your company to meet the repayments, based on both current activities and new developments.

For current activities, the bank will start by examining past performance. For instance, has performance been stable or unpredictable? Assessing additional ability to meet repayments from new activities to be developed (and therefore based on forecasts) will, of course, be much more difficult. The bank will therefore be very cautious about any forecasts.

How can you anticipate?

  • By supporting your forecasts properly: how do you intend to achieve the positive figures forecast? Who will be responsible for which actions?
  • Do not just assume positive scenarios; prepare a contingency plan too. What can you and should you do in the case of unexpected difficulties?

4. Risk mitigation in the form of real security or guarantees

Generally, the bank will request security and guarantees to minimise the risk that it bears (and therefore its loss if you can no longer repay the credit facility). The most common forms of security are a mortgage charge on property or a pledge on assets, such as stock and/or receivables.

However, providing real security may not itself be enough to be approved for credit. The bank places far greater importance on the borrower accepting some of the risk and sufficient ability to meet repayments.

How can you anticipate?

  • By agreeing to grant your bank a preferential right to the goods that it has a key role in financing. In the event of failure or liquidation, this will prevent the proceeds of the financed goods from going to creditors that did not contribute to the financing. The enforced realisation of real security does not always raise enough capital to cover the outstanding credit sums and interest due.
  • By providing information about the distribution of your lines of credit and guarantees (and the order of priority of registration) among your banking partners.

5. The operational relationship

It makes sense that the bank that provides you with credit will also want to see the cash flows generated by this finance (needed to meet your credit repayments) go through its accounts. This allows them to grow the credit relationship to a fully-fledged operational relationship, which is vital under the new Basel III regulations. The cash also enables the bank to grant further credit.

How can you anticipate?

  • By assigning a portion of your incoming and outgoing payments (the "float") - and the deposits that they generate - to your bank, in proportion to the amount of credit provided and for the term of the credit facility.
  • By providing transparent information on how your incoming and outgoing payments - both domestic and international - are organised and where you intend to keep any surpluses.

It pays to prepare and document your credit application well. Openness and transparency are the keywords. Both your company and the bank have an interest in a realistic assessment of the application in order to avoid any possible repayment problems.

Article

08.02.2016

How do you put a good credit application together?

The ideal credit application contains all the required qualitative and quantitative information, as well as an overview of the existing and new security.

Before a bank can provide a business with credit, it must be aware of the risks inherent in the business activities. It is important that you provide your bank with a clear understanding of the operation, financial situation and future plans of your business, but also that you convince the bank of your strategy in order to guarantee continuity.

The more open and transparent your approach, the higher the chance of success of your credit application. A relationship of trust with your bank is crucial.

Do you need to supply a full set of accounts? Not necessarily. First and foremost, it is important that you have all data to hand so that you can present it easily during the credit meeting with your relationship manager. After the meeting, your relationship manager will structure the information and complete the application. By documenting certain items in advance and handing this information to your relationship manager, you will help speed up the process, especially in the case of more complex situations and applications.

Is it your first credit application with the bank? If so, you will have to provide more information than when you have an existing credit relationship, and so the process will require more time and effort.

The ideal credit application includes:

1. The qualitative part: the index card of your company

The bank is only able to assess the risk of providing credit once it has a clear understanding of the operation and the activities of your business.

You can ensure that this process runs more smoothly by preparing a presentation in which you explain how the business works, its development and the strategy for the future.

Start with a SWOT analysis

Because you know the business better than anyone, you will be well placed to anticipate the questions the bank may ask. While at times these may seem rather probing and critical, this can be attributed to the current state of the economy and the attendant low growth prospects and uncertainties, for both the business and the bank.

Apart from the positive side of the story of your business, it is best to also consider possible weaknesses and threats. A SWOT analysis is an excellent aid to help you prepare this.

Practical experience

The best way to understand a company is to see it at work. Do not hesitate to invite your relationship manager to visit the business so that they can form a concrete picture of your specific activities and financing needs. It is also advisable to keep your relationship manager regularly informed about the specific implementation of the investments: are they going according to plan and as expected?

What information should you include?

The following questions may be taken as a guide for describing your business model and activities:

  • Your product and service offering
    • What market(s) are you targeting? How do you expect these markets to develop? How will you anticipate any changes?
    • How do you position your offering? For instance, do you place special emphasis on service or more on experience, quality or keen prices?
    • Do you have ISO certification or other quality marks for your products or services?
    • What permits, licences or patents do you have?
    • What stock do you hold and how quickly do they turn over?
    • How will the project you wish to finance affect your offering or market position?
    • What market(s) are you targeting?
    • How do you expect these markets to develop? How will you anticipate any changes?
    • How do you position your offering? For instance, do you place special emphasis on service or more on experience, quality or keen prices?
    • Do you have ISO certification or other quality marks for your products or services?
    • What permits, licences or patents do you have?
    • What stock do you hold and how quickly do they turn over?
    • How will the project you wish to finance affect your offering or market position?
  • Your employees
    • What do you do to recruit, motivate and retain suitable employees?
    • Are certain employees crucial for the functioning of the business? Has any thought already been given to succession planning?
    • Do you use external advisers for certain skills not available within the business?      
    • What do you do to recruit, motivate and retain suitable employees?
    • Are certain employees crucial for the functioning of the business? Has any thought already been given to succession planning?
    • Do you use external advisers for certain skills not available within the business?
  • Your customers
    • Do you service an extensive and diversified customer base or are you dependent on a limited number of customers?
    • Do you have a clear idea of the creditworthiness of your customers?
    • What are your payment terms?
    • What effect would it have if your most important customer (or one of them) disappeared
    • Do you service an extensive and diversified customer base or are you dependent on a limited number of customers?
    • Do you have a clear idea of the creditworthiness of your customers?
    • What are your payment terms?
    • What effect would it have if your most important customer (or one of them) disappeared?
  • Your suppliers
    • How many suppliers do you have and who are they?
    • What are the payment terms of your suppliers?
    • Could your business cope if one or more of your larger suppliers were to disappear?  
    • How many suppliers do you have and who are they?
    • What are the payment terms of your suppliers?
    • Could your business cope if one or more of your larger suppliers were to disappear?
  • Your competitors
    • Who are your main competitors and how do they position themselves?
    • How do your competitors perform? Do you know their market shares, their financial situations and their financial performance?
    • How does your business respond to market newcomers or to innovations by competitors?        
    • Who are your main competitors and how do they position themselves?
    • How do your competitors perform? Do you know their market shares, their financial situations and their financial performance?
    • How does your business respond to market newcomers or to innovations by competitors?
  • Structure, management and shareholding
    • How is the company structured? How is it managed and who are shareholders?
    • Are the management and the shareholders fully engaged in the company's activities, or do they also manage other businesses?
    • How experienced are management? What is their track record?
    • Has any thought been given to the succession of the managing director and other key people?
    • What is your policy on dividend payments?
    • Is your company part of a group? If so, remember to explain the group structure and activities.

2. The quantitative part: a look at the figures

Once you have explained the practical operation of the company, it is time to examine the numbers, as these clearly have a key role in determining your creditworthiness or ability to meet repayments.

This "classic" part of the credit application includes the financial plan, the balance sheet, income statement and forecasts. The basic idea is that you first form a realistic picture of the financial situation of the company, based on these figures. With this information, you can then give the bank a clear view of:

  • the business activity, which must be profitable enough to repay the credit facility
  • the financial buffer, which must be large enough to cope with setbacks in the business activity

Here again, it is crucial to provide the bank with information as transparently and as fully as possible.

What information should you include?

In a good application, the description of the financial situation of the company will take account of the current situation as well as the history and the future. Necessary components are:

  • The balance sheet and income statement. Ideally, you will have the audited accounts (including the consolidated accounts) of the two most recent financial years. Where relevant, you will also include the auditor's qualified opinion.
    If the annual accounts have not yet been audited, a preliminary balance sheet and income statement can be used. Although they offer less certainty, they can still provide a basis, especially if the quality of the figures in the past appears reliable.
  • Interim figures
  • An evaluation of the liquidity, solvency and profitability of the company and a detailed plan to tackle any problems that may arise. When trying to estimate future developments, it is highly advisable to assume a variety of scenarios - ranging from positive to neutral to negative
  • An overview of your credit facilities and an explanation of the guarantees and repayment commitments to other credit institutions. This also includes factoring and leasing finance.
  • An explanation of the off-balance sheet liabilities and the accounting policies applied

A list of movable assets and real property owned by the company

Useful information


Remember to hire an external adviser to collect this information or to extrapolate the various scenarios. In the Flemish Region, Brussels and the Walloon Region, financial assistance with these costs is available from the government.

Project-specific information

In this section, you explain exactly what you want to finance, using what resources and why. You also explain how you will repay the external financiers. Specifically, you will include the following information:

  • The financial plan: the purpose of the finance, the proposed budget - where relevant, supported by proposals, performance undertakings, and guarantees after delivery - and the expected cash flow.
  • The finance: resources used (own capital, credit lines via one or more banks, other sources of financing, etc.), duration, allocation (e.g. in a lump sum or in a number of tranches) and guarantees
  • Monitoring arrangements: how and how often will you monitor progress of the project and financing against the original plan
  • How much additional working capital will the company need if the investment leads to additional turnover, and how will you finance that additional need
  • An explanation of the reward and value creation for the investors

3. Security and guarantees

The final part of the credit application covers the security. The bank's aim is to acquire a lien on the assets for which it is providing finance.

In the event of an enforced sale, the bank would have priority over other creditors in respect of those assets. In other words, the security will help to limit any loss suffered by the bank. The most common forms of security are a mortgage charge on property or a pledge on movable assets.

Increased uncertainty

Given the uncertain economic times in which we live, banks these days place more emphasis on real security. As the risks increase - you only need to look at the increasing numbers of bankruptcies, and the dwindling solvency, liquidity and profitability of some companies - it simply makes sense to ask for more security.

The financed assets as a guarantee

For some projects, a form of asset-based financing, such as advance factoring or leasing, may prove more beneficial than classic bank credit. These modalities link the financing to a property right in specific assets (such as accounts receivable, machines or stock) - the financed assets therefore constitute the guarantee.

This is a highly transparent mode of finance, both for the company and for third parties (such as banks, customers and suppliers) given the clear link between the assets and their financing. With credit, this link is often less discernible, for instance, where overdraft facilities or straight loans are used.

Own contribution

A particularly strong argument in favour of a credit application is belief in your own business. Nothing is more convincing than making a contribution to the project's financing from your own resources. In this way, the financial burden and the risks are shared more evenly between the borrower and the bank. It therefore pays to anticipate the question of making a contribution from your own resources so that you know in advance what contribution you would effectively be able to make.

If, for instance, you considered it financially viable to contribute 25% of the investment amount yourself, this would send out a particularly positive signal to the bank. You will of course have to support the viability in a credible way, for example, by providing evidence of the following:

  • the liquidity available in the business which is not reserved for any other purpose
  • the current ability to meet repayments from current activities (which have a stable character)
  • the maintenance of, or increase in, existing current account advances by the shareholder(s) of the business
  • a policy of profit reservation

Transparency and planning

In this part of the credit application, it is again important to communicate openly and transparently in order to further support the relationship of trust with the bank. Also bear in mind that releasing additional resources can be a time-consuming process. You should therefore consult the shareholders in good time.

Useful information


If your company is unable to provide any further security, it may be possible to use the various assistance and guarantee schemes of the federal and regional governments.
Article

08.02.2016

What if you are unable to meet the repayments of your loan?

Contact your bank as soon as the "warning signs" appear. This will improve your chances of finding a good and balanced solution.

Even if your credit application is approved without a hitch and the financing starts to come on stream, your financial situation can still change quite unexpectedly. Setbacks can never be ruled out entirely. In that case, your interests are best served by informing the bank without delay.

Warning signs

The sooner you identify and report any financial problems, the greater the chance of a solution being found. You should therefore be constantly alert to the following warning signs:

  • the turnover of the business falls as the stock grows
  • the turnover of the business remains constant, but profits fall
  • the turnover of the business increases, but profits do not follow suit
  • dwindling solvency, profitability and liquidity
  • you find it difficult to meet your social security, VAT or other liabilities

For its part, the bank may start to ask questions if it notices increasingly frequent unauthorised borrowing, there are fewer transactions on your accounts or your use of credit increases while turnover decreases.

Balanced solution

If you see the ability of your company to meet its repayments come under pressure, it is essential that you take swift action to rectify the situation. Remember that the bank also has no interest in the potential failure of your company. The bank will then help you find a good, balanced solution.

It does this by deploying experts specialised in assisting companies facing difficulties, regardless of the branch of industry. These teams have a wealth of experience in problem analysis and financial restructuring. By having them involved in the process from the start, you will generally be able to prevent things taking a turn for the worse.

Commitment

In some cases, such as when your product or service has reached the end of its life or the market for it has disappeared, there will of course be little they can do. This will also be the case where the management or shareholders no longer wish to invest any further money or effort, or no longer believe in the company's survival.

It is therefore important not only to present a realistic business or restructuring plan, but also to commit yourself 100%. Our experience shows that a balanced approach by shareholders and the bank working together considerably increases the chances of a successful turnaround!

Article

18.04.2016

Crowdsourcing: the basics

Are you undecided about the various ways of increasing your offering? Has R&D encountered a technical problem? Perhaps your clients know more.

The concept of crowdsourcing is simple: you call for the contribution of your customers and/or the general public. An approach which is gaining popularity worldwide even though it is not actually new. As far back as 1714 crowdsourcing by the British government led to the invention of the chronometer and therefore a reliable method of calculating longitudinal position at sea. 

Three hundred years later the basic principles remain the same: in crowdsourcing you work with a network of individuals and communities within and largely outside the company. They make a contribution in the form of ideas, time, expertise or financial support. This enables new solutions to be accessed and makes realisation of joint projects and optimisation of tasks possible while keeping down costs.

This system is based on exchange, transparency and communication. It also works for all sectors and at all management levels. You should be able to engage a community of designers for your product development for example and choose the best proposal together with the public. Then you will bring it onto the market, possibly even financed via crowdfunding.

The crowd is ready for this

This is certainly no science fiction, as proven by the growing success of the system. It is also the ideal time to get involved with crowdsourcing:

  • communicating with the crowd is easier than ever before thanks to technological development, the social media boom and the development of online communities;
     
  • the crowd is straining at the leash: a joint survey by several European universities showed that 54% of Europeans would like to support projects by companies and private individuals creatively and/or financially;
     
  • co-creation, or developing a project together, is hot. The crowd can join in with a project for a whole host of reasons: the necessity for a creative outlet, commercial motives, dedication to society or just for a sense of honour or fun;
     
  • the economy urgently needs sources of financing and innovative projects in order to achieve new growth and to increase competitiveness.

You too?

It will definitely take some getting used to as such a system radically changes the way in which a company gathers information, carries out research, produces and even finances projects. At the same time relationships with clients or users change as they evolve into potential colleagues, financiers and ambassadors.

But this does not have to be a threat. On the contrary, crowdsourcing provides you with a unique opportunity to relinquish your traditional methods. You can now look externally for ideas, get feedback from the crowd on ideas developed internally or even combine both approaches. The possibilities are endless.

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