SME Rating Dilemma

Agencies, Models, Read, Regulations

Small and medium-sized companies have difficulties communicating their creditworthiness credibly. Recognized credit rating agencies concentrate their services on companies that go through a committee-based rating process. The legal framework in Europe offers no alternative to this. Only those who meet all the requirements of the EU regulation on credit rating agencies can be recognized as a rating agency. These requirements provide for an assessment process for which analysts are responsible, which leads to a decision by a rating committee. The agency’s supervisory and control bodies must be filled accordingly. Recognized rating agencies must have at least two independent non-executive directors on their board, provide a review function, etc.

Only personalities with many years of professional experience, academic training and aptitude of character are considered as rating analysts. Analysts are not allowed to perform sales functions for the rating agency at the same time. It is therefore necessary to appoint additional employees who are responsible for business development. All these requirements mean that the operation of a recognized rating agency is associated with considerable costs. Accordingly, the supervisory authority responsible in the EU, the European Securities and Markets Authority (ESMA), requires the rating agency to have sufficient capital to ensure the agency’s continued existence. All of these requirements mean that the traditional rating process, as required by law, is too expensive for small and medium-sized companies.

The rating process is too expensive for small and medium-sized companies, as the financial requirements are much lower than in large corporations. That already results from the definition of small and medium-sized companies. The costs of the rating process must be put in relationship to a significantly smaller financing volume.

However, the rating process is not necessarily easier for small and medium-sized companies than for large companies. Sometimes the opposite is even true: large companies are often organized similarly as corporations, have diversified business activities and compete with comparable companies with their products.

Small and medium-sized companies, on the other hand, often have specialists who offer unique products for a relatively small market. Often these companies are “hidden champions” who occupy a niche market. Their special expertise protects them against competitors. Due to the specialization and special expertise, the best small and medium-sized companies in terms of creditworthiness are often not easy to identify. For rating agencies that work in accordance with the restrictions of the EU regulation on rating agencies, there is hardly any team of analysts who have the necessary specialist knowledge in all specialist areas.

Credit bureaus therefore intervene in the movement of goods with customers and suppliers. These collect data from court registers and other public sources. However, due to the applicable disclosure requirements in the EU, this data is of limited topicality. Ratings calculated using such data are correspondingly outdated. Ratings are often determined on the basis of annual financial statements from the year before last. In addition, small companies, which can include listed companies, are not required to disclose their income statements.

These adverse conditions limit the possibilities of developing suitable rating models for small and medium-sized companies on a purely mathematical-statistical basis using the statutory mandatory publications.

Only a rating agency that works on a model basis but acts on behalf of the company assessed can lead out of this dilemma. In this case, the company has the option of providing more up-to-date and comprehensive data specifically for the purpose of credit rating. The annual financial statements prescribed by accounting law have many addressees. There is also a dependency on the tax balance sheet. For these reasons, statutory annual financial statements are not ideal for creating ratings.

According to the EU regulation on rating agencies, ratings based on a scoring model are not subject to approval by the European Securities and Markets Authority (ESMA). Since these ratings are not subject to supervision, they may not be used for certain applications. This affects banks, insurance companies and other institutional investors.

The aspects mentioned illustrate the difficulties that small and medium-sized enterprises in the EU face when it comes to rating.

Rating Repair of a German Hotel Consulting Company’s Credit Report

Bureaus, Read, Repairs, Reports

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.

Key Financials and Payment Details Summary

“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.

Auditor Detials, Business Purpose and Additional Industry Codes

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.

Score Summary

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.

Credit Limit and Contract Limit

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.

Directors / Shareholders Summary and Current Directors

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.

Beneficial Ownership

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.

Assets and Liabilities

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.

Debt Ratio

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.

Cash Ratio

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

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.

Basel III: Impact of the New Banking Supervision Law on SMEs


Oliver Everling and Rainer Langen (publisher): Basel III: Effects of the New Banking Supervision Law on the Mittelstand, Bank-Verlag GmbH, 1st Edition Cologne 2013, 199 pages, Art. 22486-1300, ISBN 978-3-86556-354-5.

The book is aimed in particular at the corporate clients of banks who, as with Basel II, are now asking about the consequences of Basel III for optimizing their financing.

The book follows the concept of a collage of papers, statements, and numerous advice – loosened up by interviews – and shows various different perspectives and concrete practical solutions for future SME financing, which should lead to a successful cooperation of entrepreneurs and investors.

The content is structured as follows:

  • General: Regulatory changes – from Basel II to Basel III
  • Bank overview: How is lending policy changing in competition?
  • Entrepreneurship: Consequences in SME financing
  • Solutions at the interface of corporate account managers and entrepreneurs
  • Tips for entrepreneurs (financing, bank discussion, rating process)
  • Special topics (real estate, Austria)

Oliver Everling und Rainer Langen (Herausgeber): Basel III: Auswirkungen des neuen Bankenaufsichtsrechts auf den MittelstandBank-Verlag GmbH, 1. Auflage Köln 2013, 199 Seiten, Art.-Nr. 22.486-1300, ISBN 978-3-86556-354-5.

Financial Communication: Opportunities Through Credit Mediation


Frank Armbruster, Oliver Everling and Rainer Langen (publisher): Financial Communication: Opportunities through Credit Mediation, Bank-Verlag Medien GmbH,, Cologne 2011, Art. 22,474-1100, ISBN 978-3-86556-262-3.

At the end of 2009, the Federal Government of Germany decided to commission a credit intermediary with the implementation of the credit intermediation procedure. Since then, a number of different private-sector offers have been established on the market – all with the aim of building bridges of understanding between entrepreneurs and banks, overcoming misunderstandings in communication and providing solutions for goal-oriented cooperation in financing issues. Credit mediation should help to improve the supply of the middle class with credits. Credit mediators are independent mediators between the financial and real economy.

Proper financial communication is an essential part of successful corporate governance. Because good financial communication promotes the growth potential of a company and the associated employment effects. The bank does not know how the individual entrepreneur is “ticking”. The best way to solve this problem is to create a win-win situation for the bank and the entrepreneur. The loan mediator will help prepare for the bank conversation, analyze business models or provide public support programs.

Frank Armbruster, Oliver Everling und Rainer Langen (Herausgeber): Finanzkommunikation: Chancen durch Kreditmediation, Bank-Verlag Medien GmbH,, Köln 2011, Art.-Nr. 22.474-1100, ISBN 978-3-86556-262-3.

Buy, Rent and Lease in the Rating


Christoph J. Börner, Oliver Everling and Robert Soethe (publisher): Buy, Rent and Lease in the Rating: Assessing the Financing Paths of Long-lived Assets Reliably, Betriebswirtschaftlicher Verlag Dr. Th. Gabler, Wiesbaden,, hardcover, 1st edition 2008, 305 pages, ISBN 978-3-8349-0543-7.

Businesses depend on the use of long-lived assets in their business activities. In addition to the purchase here offer the procurement options in connection with rental and leasing contracts. However, which option is more effective for the respective company can hardly be assessed universally. The complexity of the comparison results from the diversity of objectives and instruments, the different expectations regarding usage patterns and cost structures.

The rating provides a new starting point for comparing the design options of purchase, rent and leasing. The impact of buying, renting or leasing in rating has become even more relevant to the financial management of any company since the entry into force of Basel II. This book systematizes from various perspectives the technical discussion of the effects of purchase, rent or leasing in the rating.

The main topics are:

  • Economic and legal bases
  • Design alternatives according to commercial and tax law as well as IFRS
  • Special features of individual asset classes (real estate, movables, intangible assets)
  • Design options in Ratings

Christoph J. Börner, Oliver Everling und Robert Soethe (Herausgeber): Kauf, Miete und Leasing im Rating:: Finazierungswege langlebiger Wirtschaftsgüter sicher beurteilen, Betriebswirtschaftlicher Verlag Dr. Th. Gabler, Wiesbaden,, gebundene Ausgabe, 1. Auflage 2008, 305 Seiten, ISBN 978-3-8349-0543-7.

Rating Software


Werner Gleißner, and Oliver Everling (publisher): Rating Software. Which Products Are Used by Whom ?, Verlag Franz Vahlen,, Munich 2007, 448 pages, ISBN 978-3-8006-3248-0.

For many medium-sized companies, the question of improving their own rating results is currently being raised, even if they want to compete for debt capital in the future after the Basel consultation paper comes into force in 2006. For this purpose, a variety of rating software offers already exist on the market.

However, as a rule, the software application does not provide sufficient transparency as to which evaluation methods and weighting of the partial results are carried out. Therefore, it makes sense to use a decision support in the choice of rating software and to evaluate the software used accordingly.

In Part I of the book, based on the methodology and the requirements of a rating based on the Basel II Accord, the requirements for a rating software are described by the publishers and their evaluation criteria are presented. In addition, the design variants of the software are systematized. Furthermore, the state and development tendencies of this expanding field of application are shown.

In Part II, well-known authors from the rating advisory sector compare and rate the rating software products available on the market. In doing so, both the scope and the system of presentation are strictly defined for the individual contributions in order to make the comparative assessment objective.

Parts III and IV present various rating software systems, highlighting both bank-specific features and the application of the software and concrete experience reports.

The book is best for specialists and executives of medium-sized companies, credit institutions, tax consultants, auditors and management consultancies.

Werner Gleißner, und Oliver Everling (Herausgeber): Rating-Software. Welche Produkte nutzen wem?, Verlag Franz Vahlen,, München 2007, 448 Seiten, ISBN 978-3-8006-3248-0.

Financial Rating


Ann-Kristin Achleitner, Oliver Everling and Karl A. Niggemann (Publisher): Financial Rating: Design Options for Improving the Creditworthiness, Betriebswirtschaftlicher Verlag Th. Gabler, Wiesbaden, 1. edition January 2007,, hardcover, 275 pages, ISBN 978-3-8349-0245-0.

Within the scope of corporate financing, there is a need for each company to document its own balance sheet credit rating. Especially lenders need information about a company’s ability to meet its future payment obligations on time and in full. In this context, a financial rating represents an optimal instrument for the early recognition of impending financial risks for every entrepreneur and is the basis for preparing for negotiations with lenders. This book explains the hard facts and quantitative criteria that are important in the rating and is very practice-oriented. An important focus is the detailed presentation of the annual financial statements analysis and the balance sheet analysis in the rating.

Ann-Kristin Achleitner, Oliver Everling und Karl A. Niggemann (Herausgeber): Finanzrating: Gestaltungsmöglichkeiten zur Verbesserung der Bonität, Betriebswirtschaftlicher Verlag Dr. Th. Gabler, Wiesbaden, 1. Auflage Januar 2007,, gebundene Ausgabe, 275 Seiten, ISBN 978-3-8349-0245-0.

Succession Rating


Ann-Kristin Achleitner, Oliver Everling and Stefan Klemm (publisher): Successor Rating: Rating as an Opportunity for Company Succession: Rating as an Instrument of Medium-sized Company Succession, Betriebswirtschaftlicher Verlag Th. Gabler, Wiesbaden 1st edition January 2006,, hardcover, 366 pages, ISBN 3-409-14327-0.

The topics “medium-sized business succession” and “rating” are closely interwoven. At the latest when the bank adapts the credit terms with the reference to the age and the unresolved succession question of the entrepreneur to the increased credit default risk from their point of view, it is worth analyzing the underlying relationships.

Basel II motivates banks to adjust the loan terms to the respective risk assessment of the borrower. At the same time, banking supervision does not stick to qualitative direction. Rather, it is precisely prescribed with how much equity the bank has to deposit loans of different risk classes. In addition, Basel II provides guidelines for the design of bank-internal rating systems.

The systematic recording and evaluation of factors such as an “existing emergency planning” or “existing succession planning” are the consequence. A lack of succession planning leads more frequently than before Basel II to significantly worse credit conditions up to the refusal of credits. Even the good personal relationship with the corporate customer service can not help here.

With the concretization of the Basel II guidelines by the banks and thus systematization of the evaluation of the credit risk, the leeway of the account managers disappears. Here we see a focus of the editorial volume – with up-to-date reference and direct assistance for the concerned entrepreneur. The present book shows internal views of the bank’s internal rating. The underlying regulations are presented and explained in detail. It will be shown where creative leeway opens up and how individual banks implement the requirements. This explanatory information is followed by concrete help for the entrepreneur. In doing so, the relation to succession is always established and the meaning of the controlled succession planning as an input parameter of the rating is reflected.

Ann-Kristin Achleitner, Oliver Everling und Stefan Klemm (Herausgeber): Nachfolgerating: Rating als Chance für die Unternehmensnachfolge: Rating als Instrument der mittelständischen Unternehmensnachfolge, Betriebswirtschaftlicher Verlag Dr. Th. Gabler, Wiesbaden 1. Auflage Januar 2006,, gebundene Ausgabe, 366 Seiten, ISBN 3-409-14327-0.

Start-up Rating


Ann-Kristin Achleitner and Oliver Everling (Publisher): Start-up Rating: Rating of Young Companies (German Edition), Betriebswirtschaftlicher Verlag Th. Gabler, Wiesbaden 1st edition August 2004,, hardcover, 516 pages, ISBN 3-409-12572-8.

The classification of the future opportunities of a start-up project by rating – presentation of the business fields, products and services, the prognosis of the incomes and expenditures, the calculation of essential characteristic numbers and the evaluation of financing instruments up to the description of expected market developments – help the company founder to understand his chances and properly evaluate his enterprise. A good rating result provides support in negotiations with investors.

This practice-oriented book goes a long way from the consideration of the rating events, rating instruments to the concrete benefit of the rating for start-ups. It also offers recommendations for action to improve the rating result and includes reports from successful start-up founders.

Professor Dr. Ann-Kristin Achleitner is holder of the KfW Endowed Chair for Entrepreneurial Finance and Scientific Director of the Center for Entrepreneurial and Finance Studies at the Technical University of Munich, Honorary Professor at the European Business School and Privatdozentin for Finance and Accounting at the University of St. Gallen.

Dr. Oliver Everling is the founder and owner of Everling Advisory Services, Frankfurt am Main, a provider of consulting services, publications and rating events. He is the publisher and author of numerous books and specialist articles on rating.

Ann-Kristin Achleitner und Oliver Everling (Herausgeber): Existenzgründerrating: Rating junger Unternehmen (German Edition), Betriebswirtschaftlicher Verlag Dr. Th. Gabler, Wiesbaden 1. Auflage August 2004,, gebundene Ausgabe, 516 Seiten, ISBN 3-409-12572-8.

Rating Practice Manual


Ann-Kristin Achleitner and Oliver Everling (Publisher): Rating Practice Manual: Answers to the Challenge Basel II, Betriebswirtschaftlicher Verlag Th. Gabler, Wiesbaden 1st edition May 2004,, hardcover, 952 pages, ISBN 3-409-12523-X.

How is the rating market organized? What is the best possible preparation for a rating? How can you use and improve ratings? Renowned experts point the way to optimal credit rating and favorable conditions.

Ann-Kristin Achleitner und Oliver Everling (Herausgeber): Handbuch Ratingpraxis: Antworten auf die Herausforderung Basel II, Betriebswirtschaftlicher Verlag Dr. Th. Gabler, Wiesbaden 1. Auflage Mai 2004,, gebundene Ausgabe, 952 Seiten, ISBN 3-409-12523-X.

Rating – Opportunity for SMEs According to Basel II


Oliver Everling (Publisher): Rating – Opportunity for SMEs according to Basel II. Concepts for Credit Assessment, Key to Financing, Betriebswirtschaftlicher Verlag Th. Gabler, Wiesbaden 1st edition December 2001,, hardcover, 700 pages, ISBN 3-409-11812-8.

As recently as the 1980s, ratings in the German-speaking world were regarded as a peculiarity of the US capital markets. At that time, ratings and rating agencies in at least 50 countries were also widespread outside the United States. At first it seemed that differences in the financial systems were responsible for the fact that ratings did not spread in Germany: the universal banking system here, the segregation banking system there. Too big were the opposites. On the one side of the Atlantic, virtually every company present on the capital market was already equipped with ratings, on the other side of which the circle of rated companies was limited to those that served the international financial markets. Even for this circle the relevance of ratings had to be questioned.

What benefit should be associated with the classification of globally known “first” addresses? So the creditworthiness of such companies in financial circles was long known! However, it was precisely the Siemens group that was the first address in the industry in Germany to be rated as an independent agency. “Rating” has long since developed into an indispensable business card on the international financial markets. Those who were above any credit rating found that rating was a crucial additional element of building trust among financiers. For business partners around the world, the rating is the essential signal for assessing the viability of a company.

Oliver Everling (Herausgeber): Rating – Chance für den Mittelstand nach Basel II. Konzepte zur Bonitätsbeurteilung, Schlüssel zur Finanzierung, Betriebswirtschaftlicher Verlag Dr. Th. Gabler, Wiesbaden 1. Auflage Dezember 2001,, gebundene Ausgabe, 700 Seiten, ISBN 3-409-11812-8.