5 Ways to Improve your Credit Grade and Pricing
Banks must meet capital adequacy requirements and as a result if you have any bank debt it is a Basel II/III requirement that you are assigned a credit grade (or credit score). Essentially, the weaker your credit grade the higher your perceived risk to the bank. The higher the risk the more capital a bank has to set aside when it lends to you. Your grade therefore directly impacts on the interest rate and fees you are charged.
A credit grade is driven by financial and non-financial factors relating to your business although each bank will have its own scoring systems and weightings. Financial data is unique to your particular business and we would be happy to discuss this with you, however, listed below are 5 non-financial “must haves” that impact all businesses:
1. Correct management structure – a bank should see that directors and senior management have clearly defined roles. In large companies a range of executive and non-executive directors must be in place, with key decisions being taken with full consultation and involvement of all directors. Notwithstanding the size of the business there should be a designated finance role/team.
2. Experienced management team – banks need to see that key individuals have a number of years experience in the sector (even better if they have successfully managed through difficult times). There should be evidence of clear procedures for recruitment, training and monitoring staff. The bank needs to be confident in your ability to nurture and retain staff within your company.
3. Clear strategic direction must be demonstrated with past performance and strategy well explained in any written communication with the bank. Whilst everyone recognises that performance will suffer in an economic downturn, the bank will be looking for evidence that you have successfully managed this and taken action, such as cost cutting or renegotiation of bank facilities in good time.
4. Quality financial information must be provided to the bank in a timely fashion. Typically this should include annual accounts, interim accounts, management accounts, budgets and financial forecasts. Forecasts and management accounts should include profit and loss, cash flow and balance sheet information.
5. Realistic expectations – the budgets and forecasts you present to a bank must be realistic so that when compared to actual data there is minimal variance. The bank as a result will gain confidence in the accuracy of your forecasting abilities. It is always best to exceed a realistic target than fall short of an optimistic one.
Non-financial factors are key in determining your bank facility pricing. Structures, strategies and controls not only need to be in place but need to be communicated effectively to your bank. As a result your bank will have a clearer understanding of your business, be more confident in your business and more confident in your ability to run it effectively. This will not only stand you in a much stronger position to negotiate the finance you need but also have a positive impact on your credit grade and pricing.