According to a study by the KfW banking group, creditworthiness will exert a greater impact on SMEs’ financing terms in future. “It won’t be enough for a company simply to present an acceptable balance sheet (which really only enables a historical assessment of a company) and increase its equity ratio, for instance,” the study states, and continues: “It will also need to have the right forward-looking business concept in place – the strategic orientation, financial controlling, and options in terms of management succession all play a part.”
Hard and soft factors
Alongside the hard factors (balance sheet, sales, profit and loss account), companies in future will increasingly be assessed using what are known as “soft factors”. Whatever they do, companies should critically assess the following points and (ideally) be able to provide positive answers when talking to their bank:
- Own situation in terms of sector, market, and competition: Key factors here are the company’s position within the sector (possible competitive advantages due to niche or brand creation), the current economic situation, and long-term growth potential.
- Management quality within the company: This includes aspects such as business and sectoral expertise within management, reliability of the management team’s statements, and adherence to pledges and deadlines. Other issues include the average age of the management team, contingency plans for the absence of the CEO or other key staff, and an appropriate succession arrangement.
- Quality of the company’s staff: This primarily involves securing specialist expertise for future requirements, e.g. via staff training and qualification, and efficient planning of staff requirements and deployment.
- Potential for success: Includes sales strategy and planning and quality management.
- Risk classes: A company should be equipped to cope with anything, from market-linked sales fluctuations and technical risks through to contractual and costing risks that could have a negative impact on success.
- Quality of previous business relationships and own payment patterns: A key factor here are the company’s own payment practices towards its suppliers or financial institutions, for instance (repayment of loans).
- Private assets: The most sensitive point concerns private assets. The rating is in part dependent on the readiness of an individual entrepreneur or management team to bear risks, e.g. by providing security for the company loan.
Each of these points is then subjected to an average evaluation, from which an overall assessment of the soft, i.e. qualitative factors of a company is generated. In conjunction with the “hard ” factors, this produces the overall rating and thus also the credit risk.
Optimizing planning and controlling instruments
In future, banks will require up-to-date and comprehensive reporting from borrowers. This may take the form of an integrated plan with data for the next five years, detailed statements about future investment activity, consolidated company information, cash-flow calculations, and even monthly reporting. To this end, the necessary up-to-date information on receivables, dunning, profit margins, knowledge about customers and customer groups, and costings should be readily available, and regular cost controls should be in place. Financial controlling and planning are therefore becoming increasingly important. According to the WGZ Bank study, SMEs also rank these points at the top of the agenda. In addition to increased equity ratio, SMEs will primarily be looking to score points with the banks in future through optimized planning and controlling instruments, more informative reports, and better quality management.
It is all but impossible to fulfill requirements such as these without an excellent IT infrastructure and corresponding solutions. According to the results of the Basel II study conducted by Postbank, eleven percent of those SMEs surveyed were prepared to spend money on new data processing and IT systems. SMEs require systems that automate, transparently map, and accelerate processes such as handling incoming invoices. Furthermore, the reporting functionality should provide detailed analyses and information about for example open items, accounts receivable and liabilities, and sales analyses with only a few clicks of the mouse.
Integrated solutions mean better interest rates
“Things often look a whole lot different in practice,” reports ITS-Atlantis CEO Thomas Steinmann. “Many SMEs draw up business analyses using Excel lists.” To do so they merge data from different applications such as business software and – in the case of producers – PPS systems. “However, this means that the companies don’t have important short- and medium-term liquidity planning at their fingertips for the banks,” Steinmann continues. “In the medium term, SMEs will discover that there is no way around introducing up-to-date and integrated corporate solutions that support corresponding controlling, planning, and analysis tools.”
SAP Business One is an SAP solution especially designed for SMEs that gives company management a comprehensive view of both the current status and the future order situation and workload. This makes it easier to conduct the creditworthiness checks required for credit applications and approvals. The software also provides the necessary transparency for the company in relation to the bank, as the parameters relevant for credit can be easily checked. Larger SMEs can use mySAP All-in-One solutions or mySAP ERP, which fulfill all statutory requirements concerning Basel II. An example: According to Steinmann, the company felix martin was able to submit a detailed interim statement for July 2005 as early as the start of August 2005 using the mySAP All-in-One solution smart HIFI. As a result, the company was given a new and improved rating by the bank that entailed both a lower interest rate and a higher credit limit.
Banks also subject to requirements
The Basel requirements relating to systems technology apply both to borrowers and the lending institutions equally. “Even if the new guidelines won’t be implemented before 2007/08, banks need to operate adapted risk-management systems for an appropriate time beforehand,” explains Jörg Hashagen, Global Basel Coordinator at KPMG. “Put more simply, the final ratification of the Basel accord signifies the transition from theory to practice. And no bank can escape it.” For this reason, SAP has expanded the functional scope of the time-tested industry-specific solution SAP for Banking with a special component for the new Basel II regulations. The solution is based on the existing risk-management functionality of SAP for Banking and includes credit risks, operational risks, and market risks. At the same time, it is an integral component of the credit risk platform and takes into account the requirements for integrating both SAP and third-party systems and supports reporting in conjunction with partners.
After all, banks and SMEs benefit from up-to-date infrastructures and systems in equal measure. Banks can minimize the risk of borrowers defaulting on loans and, for their part, SMEs benefit from complete transparency, higher credit rating, and liquidity. And that results in a good rating and low interest rates.