In the old days, you could meet with your banker over lunch and agree for the next year’s funding. Today, this has become unthinkable. In the context of ongoing digitalization and further de-risking, banks continue to build a system that easily evaluates whether you qualify for a credit line or not. The decision is based on all sorts of parameters and financial ratios. Bank funding, of course, remains a very interesting option due to the fact that they can offer the lowest interest rate in the market. It is therefore crucial for every company to know what parameters and ratios banks take into consideration in order to approach the banks with a structured and complete package.
Ernest Partners understands how the banks assess risk and how their risk assessment is evolving. We can advise you on this after a thorough analysis and an eye-opening stress test.
One of the main things that we see is that, within banks, the expert judgement and common sense of experienced bankers has largely been replaced by portfolio management and a checklist-approach to credit approval. This makes it easier for the bank to quickly judge whether the application fits the risk policy. Additionally, the bank can easily steer its own balance sheet by adjusting the decision parameters. This does, however, lead to more categorization and a black & white philosophy: you are either in or you are out!
As a company, you also have to be aware that such models keep evolving due to all kinds of (unexpected) world events: banks simply have no choice but to keep adding new rules to their risk assessment, trying to adapt to each new reality. Naturally, this leads to more complex risk assessment models.
It is therefore important to question:
- Do you know how your company is assessed today? E.g.: do you know what company rating you have? Which ratios do banks look at and how do you perform on them compared to your industry peers?
- To prepare for upcoming regulation such as your ESG scorings. If not now, soon your company will be assessed on ESG and climate risk. If your company does not make enough efforts at this level, getting access to bank funding will be much more difficult.
Nevertheless, certain companies will at some point hear a “No” from their bank when they are requesting additional funding. This will have an impact on their growth with all the related consequences. What can they do then?
Besides the traditional banking market, these companies can look for alternative financing (admittedly at higher rates) like debt funds, who look at your company from a more entrepreneurial point of view. Alternative lenders can also offer true asset based finance, like leasing or factoring solutions. In some cases private money can be the answer, but remember that all of these parties also have some accountability to their own banking partners. In the end, it comes down to the fact that a large part of the risk assessment parameters trickles down to the entire market.