How does rating repair work in practice? The following is an example. A full rating repair needs even more than shown here, but this real example of a real company gives a first impression of what it’s all about. Rating repair differs considerably between different size classes of companies, type of organization, legal form, industry, etc. The following is an example of a consulting company that specializes in advising hotels.
The company uses the opportunities to work together in teams of freelancers and employees of the customers. Computers, data and software are the company’s most important assets that can be accounted for. The legal form of a GmbH is used to limit liability from business activities. It is therefore in the case of this consultancy not a function of this legal form to accumulate capital. Despite successful business activity, the balance sheet total is therefore low.
The example looks at the credit report from an international credit reporting agency for a German company. The report cannot be compared to an analysis by a Recognized Credit Rating Agency. However, information like the one shown here helps many suppliers, customers and other business partners as well as authorities before they decide on a business relationship. Wrong information can therefore have fatal consequences.
Every decision maker takes their first look at the summary. The company shown here is doing very well. This is evident from the excellent Credit Index, Risk Score, International Score and Probability of Default. This good assessment does not rule out that the report is incorrect. In particular, minor errors can be found which, although they do not significantly change the overall assessment, nevertheless create a false image of the company. Therefore, all details must also be checked. Examples of this are shown below. The consequence of the analysis can be to contact the credit reporting agency and ask for a correction of the data.
“Days Beyong Terms” (DBT) are the average days beyond terms weighted by the age and amount of invoices. The calculation uses all trade lines received from suppliers of the Trade Payment Programme. The credit reporting agency points at the fact, that this is not a statistic based on representative and complete data. Available trade lines might contain occasional instances which are not representative. It is possible that companies with a high Days Beyond Terms pay within terms on other occasions.In the case of this consulting firm, the sales from suppliers are insignificant. Accordingly, no peculiarities in payment behavior are reported.
The company shown here has been around for more than a decade. Over the years, the purpose of the company may have changed or the focus of its business activities may have shifted. If so, the consequences for the assessment should be examined. For example, it makes a big difference whether a company offers hotel advice or operates a hotel itself. Hotels have to expect massive losses due to the corona crisis. The industry will have to be assessed accordingly critically.The consultant here in the example is not directly affected by this development, so it remains to be seen whether he might even benefit from the need for restructuring in the hotel industry.
The Score Summary shows the Credit Worthiness “very low risk profile” and an Assessment: “The default risk is reckoned to be very low. The business connection can be approved.” With such a good credit rating, the only question for the assessed company is how the good credit assessment can be secured for the future.
The recommended credit limit is calculated using a formula that analyses information from a company’s financial accounts and payment record. The registered company credit limit is the credit reporting agency’s recommendation of the total amount of credit that should be outstanding at any one time. A Contract Limit is the suggested value of a contract that a company can handle. It is an assessment of the subject company and its suitability to carry out a specific contract. It is mainly based on value of the sales that a company can generate. The values shown here are very low, as if the consulting company could only place orders up to € 1k without collateral. Ratingrepair can help to raise the limit here. Various instruments are available for this, which require further advice in order to implement them.
Credit bureaus get their information from public registers. When the consulting company was founded, three managing directors were appointed. Of these, however, two left the management after just a few years. In the meantime, the management is carried out solely by the majority shareholder. There is a need for correction here. Anyone who continues to research these people would potentially draw misleading conclusions from the information obtained.
As can be seen here, the shareholders were correctly recorded by the credit reporting agency when the company was founded. In the present case, the changes in the shareholder structure were not taken into account.In the meantime, the shareholders had changed. Two shareholders sold their shares. A new partner joined. However, this is not reported here. Since there are no longer any relationships with the old shareholders, this information should be corrected.
For certain businesses and industries the Anti-Money-Laundering law (Geldwäschegesetz – GwG) requires to check if the trade partner has a beneficial owner. This identification of the beneficial owner shall prevent straw man transactions and identify the natural person in whom the economic interest is being made. At legal persons or companies a beneficial owner is every person who holds more than 25% of the voting rights, more than 25% of the capital share or more than 25% of the assets. Violations against the GwG can be fined up to 100,000 Euro per violation.
There is also a wrong statement here. Incorrect information about a beneficial owner can be severely punished, depending on the circumstances. In our example, the beneficial owner is now the German managing director / majority shareholder and no longer Swiss, as can be seen here.
The balance sheet shown by the credit bureau shows typical characteristics of a small company: The balance sheet items fluctuate greatly in their amount, since even absolutely small amounts lead to relatively large changes.
Find above a comparison of the company based on the industry code (primary) with other companies from the same industry. The analysis of the credit reporting agency has been based on the industry code 70 – Activities of head offices; management consultancy activities. The Debt Ratio measures the ratio between debts and equity of a company. Here, too, the strong fluctuations typical of small companies can be seen, which cannot be compared with those of large companies.
The Cash Ratio shows the ratio between liquid assets and short-term debts. The consulting company only delivered the legally required minimum balance sheet to the German Federal Gazette. This does not require a breakdown of the current assets. The liquid assets can therefore not be determined from the publicly available data.These items are accordingly noted in the credit report with dashes. Depending on the situation, it may be advisable to voluntarily break down these items in the annual financial statements submitted to the German Federal Gazette.
The revenues indicate the value of goods and services a company sold within it’s ordinary business activity during a trading period. An income statement does not necessarily have to be submitted to the Federal Gazette if certain threshold values for company size are not exceeded. Accordingly, only dashes are used here instead of concrete numbers. Small corporations are those that do not exceed at least two of the three following criteria (1) 6,000,000 € balance sheet total; (2) 12,000,000 € in sales in the twelve months prior to the closing date; (3) an annual average of fifty employees. Micro corporations are small corporations that do not exceed at least two of the three following criteria: (1) 350,000 € balance sheet total; (2) 700,000 € in sales in the twelve months prior to the reporting date; (3) an annual average of ten employees. The disclosure requirements are graded accordingly.
Net Profit Ratio measures the ratio between operational result and revenue. So it indicates how much the company actually earned with its achieved revenues. For the same reasons of the limited disclosure, the information on the net profit ratio is also not meaningful.In the present example, the credit reporting agency has not made any estimate of these values.
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In summary, there is a need for rating repair here. Errors on the credit report can lower the credit score. Unfortunately, the same is true for correct information. If facts are rather unfavorable that could be published voluntarily in the Federal Gazette or to the credit bureau, this can lead to a worse Credit Index, Risk Score and International Score and an estimate of a higher Probability of Default.
For certain businesses and industries the required check according to the Anti-Money-Laundering law (Geldwäschegesetz – GwG) could not be assisted by the data provided in the credit report. The reported trade partner is not the beneficial owner, since partners had changed.