Bank Rating: what it is, how it is calculated and how to improve it

 

As is well known, banks are responsible for quantifying the economic availability of each type of company, in order to have a clear and complete picture of it.

This quantification is carried out taking into account a precise method which consists in assigning a score that takes into account the actual availability for the purpose of granting any loans and / or loans of various kinds.

In much more practical terms, lenders do nothing but investigate in depth the companies that intend to apply for a mortgage or loan in order to protect their money.

On the other hand, it is useful to emphasize that the more positive the rating, the better the contractual conditions to which the requesting companies will have the right to access.

As it is easy to understand, therefore, the so-called negotiating power and, above all, the possibility of obtaining a loan or a loan depends on the rating. But let’s go into more detail and understand what is the calculation in question, what are the criteria that are taken into account and how a company must do to be able to obtain a better rating.

Rating: what is it for and what are the factors that affect it

Rating: what is it for and what are the factors that affect it

When it comes to ratings, it is necessary to specify that reference is made to European agreements which have been implemented by the Bank of Italy and which regulate the behavior of individual banks in terms of granting loans and loans. These directives, in essence, do nothing more than establish that the banks themselves must quantify scientifically the ability that each applicant company has to repay debt. Only after a careful calculation, the lender will have the possibility to understand if it will be possible to disburse the requested sum and under what conditions. An aspect that should not be overlooked when it comes to rating concerns the fact that the evaluation by banks is entirely discretionary but that the elements that must be evaluated are the same for everyone. Indeed, the applicant’s reliability cannot and must not be assessed subjectively.

Different speech, however, must be made for the final decision which can vary from lender to lender.

But what are the variables to consider when evaluating the rating?

Firstly, there is the difference between the company’s so-called own capital and that, instead, financed by third parties. Also important is the cost of interest expense that has actually been paid.

Finally, significant variables are the breakdown that exists between medium, long and short-term payables and the various receivables available to individual companies.

Be careful, however: when a lender carries out this check process, it does not completely set aside ethics.

This means that it is also essential to take into account the so-called cash flows that allow you to have an even more objective overview of the whole situation in full compliance with the law.

Trying to explain this concept in much simpler terms, even in overdraft situations, if the company proves to have a certain cash flow, showing that it has frequent cash inflows, the bank could positively evaluate this situation, taking seriously Consider the possibility of granting a loan or a loan, albeit with many reservations.

The alternatives, therefore, can be many and vary from situation to situation. For this reason, it is good to evaluate case by case and try not to apply in general the directive referring, in fact, to the rating and estimate of the solvency of the applicant company.

How to improve the rating

How to improve the rating

As it is easy to understand, the goal of each company should be to constantly improve its rating in order to be able to obtain any type of loan or loan quickly and easily.

The first and most important thing to do to do this is to understand what the parameters of the bank to which you intend to turn are actually. Regardless of this, the most important thing to do is to build a business plan thanks to which you can have a medium-term project through which to improve your rating.

All those who intend to improve their rating must not forget that using credit lines up to the limit agreed could be translated by credit institutions as an index of financial difficulties. The best thing to do, therefore, is to never go to the limit in order to avoid having to be considered a not entirely reliable customer.

Regarding this, however, it is also useful to take into account the fact that, in the event that you have to deal with a new company, reaching the limit of the credit line could also be synonymous with strong growth. Also in this case, therefore, the subjectivity of the evaluation must not be neglected, starting from the assumption that exceeding 80% of the limit that has been granted could still be potentially negative.

A separate discussion, on the other hand, must be made for the overruns which, on the other hand, become evident when the terms of the credit line that has been granted are not respected.

As it is easy to understand, this is an event that significantly worsens the situation of the company and which, consequently, leads the bank not to have the possibility to formulate a positive opinion on the applicant’s account.

Incidentally, when dealing with an encroachment, it is also the Risk Central to which the incident is reported. In this specific case, not only the reference bank will see the trespassing but also the other banks.

Certainly, this is an evaluation to be carried out on a case-by-case basis, but unlike what was stated for the credit line, the trespassing has a more specific connotation and, above all, it is treated more drastically by the bank.

In a nutshell, those who want to be able to improve their rating must do nothing but try to respect the contractual terms provided by the lending institution, not forgetting that in the future you may need other loans or loans whose positive feedback could directly depend on the applicant’s past conduct.

Bank rating: advances 2019

Bank rating: advances 2019

What may appear to customers to be an excess of severity on the part of the banks is nothing more than a form of self-protection which has the task of securing the economic resources of the banks and, consequently, the savings of all those in them they invested their money.

In the next period, the controls in this sense will certainly not tend to decrease and, therefore, it is good to take into account your rating and always try to improve it. The latest advice concerns companies that are not too familiar with financial issues: in these cases, the best solution is to contact an expert in the sector who can evaluate the situation in all its aspects and understand what to focus on to improve the rating. and consequently have a much greater chance of accessing loans or loans.

Among other things, in this way you will also have the opportunity to constantly monitor the performance of the company from a financial point of view, even during the repayment period of a loan or loan.

This will be useful to avoid risking not being able to repay the installments and, therefore, to be classified as a bad payer not only by your bank but by all the credit institutions.