Corporate Financing Put to the Test

“Basel II presents even more of a challenge to small and midsize businesses than the currency reform”, stated Thomas Struzek, Head of the Business Intelligence Business Unit at SAP Systems Integration AG, in 2001 when analyzing the situation. Other experts compare the scale of the outlay and investment involved in Basel II with the Y2K changeover. In actual fact, Basel II has a significant impact on the financial provisions of the financial institutions and a massive effect on borrowers.

Fit for rating?

The new international agreement covering equity capital, known as Basel II, aims to take into consideration “solidarity, security and risks in the financial system in a more comprehensive and appropriate manner”. The previous approach to lending of flat-rate risk weighting will be replaced with a differentiated system. The company rating of SMBs will, in the future, not just involve measurable variables such as cash flow and figures relating to profitability and debt, it will also include location factors, corporate processes, management quality, staff leadership, controlling and risk management.
At present, banks have to retain eight percent of the loan amount irrespective of the customer’s creditworthiness. With Basel II, this percentage can be higher or lower depending on the customer’s rating. SMBs that are rated according to the new guidelines are unsure as to whether borrowing funds will be expensive in the future or not. For instance, according to the study “Basel II und Sparkassen” (Basel II and savings banks) by the business consultants Kienbaum, 71 percent of savings banks would favor a company with good creditworthiness. In general terms, around 81% of the savings banks wanted to increase their lending to small and midsize businesses. However, SMBs with weak equity will in future have to make up for the risk of default through higher interest rates. Moreover, according to the findings of “Mittelstandsmonitor 2003”, German small and midsize businesses in particular “have a relatively low level of equity for historical reasons”. Therefore, small and midsize businesses will in future have to fundamentally change their financing structures as a result of structural adjustment on the financial markets and in the banking sector.
“They will have no choice but to improve their equity situation”, conclude the authors of the study. The management consultants Haarmann Hemmelrath Management Consultants GmbH (HHMC) also call for such steps in a Basel II study of small and midsize businesses in Bavaria. SMBs have to be proactive in dealing with Basel II by “being more transparent to lenders and rating agencies while also improving their position in terms of cost-effectiveness and equity”, the report states. Auditors from Pricewaterhouse Coopers (PwC) also criticize the passive attitude of SMBs of whom only around 30 percent intend to actively carry out a rating process in the next twelve months. Professor Norbert Winkeljohann, a member of PwC’s Board of Management, views the rating as an opportunity for SMBs to examine their business models and thus improve the management of their business.

Transparent data secures credit

Of equal importance to the company rating is transparent and informative data relating to orders position, products, product planning and capacity utilization. Basel II expert Norbert Winkeljohann thus advises small and midsize businesses to prepare their annual accounts in accordance with the International Accounting Standards (IAS). This produces a more realistic picture of the net worth, earnings situation and financial position because patents, trademarks and development costs are included in the balance sheet totals. The more transparent SMBs make their processes through the use of modern information technology such as planning and control tools or management information systems (MIS), the more efficiently they can be structured and improved over the whole value-added chain.
“Software can support the rating process”, confirms Jan Offerhaus of Haarmann Hemmelrath Management Consultants. “However, SMBs have to weigh up the costs and benefits when introducing a management information system (MIS).” This depends, among other things, on the size and complexity of the relevant business, continues Offerhaus. According to a CGEY study (“Mittelständler achten zu wenig auf Liquidität” [SMBs pay too little attention to liquidity]), small and midsize businesses have already had positive experience with corresponding systems. The majority of the small and midsize companies surveyed by the CGEY consultants use an MIS either as an integral component of their standard software or as an add-on module. 60 percent of the users were also highly satisfied with the ratings and the presentation.
“Integrated software provides a sound basis for management decisions and increases the efficiency of the process workflows”, concurs Gerhard Schoch, Managing Director of the SAP Business Partner ORGA GmbH. This also reduces costs in the same way as operating systems and applications through an IT service provider, continues Schoch, because “both factors reduce the cost risk and lead to better credit conditions.”

Software minimizes risks

In the future, it will be the responsibility of companies to maintain and present key performance indicators in a transparent form and to archive, manage and process their data so that it is available for use at all times. The complex process of company planning and optimization of processes is thus reliant on effective software support.
“An investment in an MIS will only be worthwhile if it is clearly structured”, states Offerhaus. “It is also essential that it can be successfully integrated into the existing IT landscape.” According to the CGEY study, 63 percent of the companies have medium-term plans to integrate other functions into the MIS. The use of powerful ERP solutions such as SAP Business One is beneficial for companies with a workforce of as small as 20 or above. According to ORGA’s Managing Director Schoch, the solution offers “a broad spectrum of integrated business management applications. It can be introduced quickly and operated cost-effectively as an ASP solution. In addition, SMBs should use it to analyze mission-critical IT processes and set up an IT risk management strategy at an early stage in order to have a clear overview of potential risk scenarios. Frank Hendricks, a consultant to small and midsize businesses and head of the CGEY study, accepts that SMBs have made “a great deal of progress in terms of reporting”. “Nevertheless, a lack of liquidity management can be deadly in the current economic situation”, he warns.
The introduction of Basel II is not planned until the end of 2006 but SMBs can already lay the foundations for a positive rating. The earlier small and midsize businesses, whether they be financial institutions or borrowers, bring their IT infrastructures and software applications in line with the new guidelines, the greater the benefits will be.

Further information:

General: and,
Trade fair: (= European Banking & Insurance Fair; formerly known as European Banking Technology Fair [= EBTF])
SAP: and

Dr. Andreas Schaffry
Dr. Andreas Schaffry