Swiss companies are increasingly turning to bank financing. How can they secure loans on favorable terms? Expert advice below.
In recent years, the number of small and medium-sized enterprises (SMEs) that are entirely self-financed has decreased. A 2021 survey by the State Secretariat for Economic Affairs (SECO) revealed that only 37% of the companies surveyed were self-financed, down from 62% five years earlier. The survey also highlighted that bank financing is now the primary source of external funding for SMEs. During the period studied, the total volume of domestic corporate loans granted by Swiss banks increased by 28%, reaching CHF 416 billion in June 2021. Approximately 87% of this total (around CHF 362 billion) was for SMEs with fewer than 250 employees.
When a company applies for a loan, the bank assesses its likelihood of meeting financial obligations (repaying the loan, including interest) in full and on time and sets the interest rate. A "score," or bank rating, is then assigned to the application. Andreas Dietrich, director of the Institute of Financial Services Zug (IFZ), explains.
What influence does a good rating have on obtaining a loan?
Dietrich: A good bank rating enables a company to secure loans more easily and on better terms, while a poor rating can lead to higher interest rates or difficulties in obtaining loans. Therefore, a good rating impacts both the availability of credit and the conditions attached to it.
What criteria are considered when establishing the rating?
Dietrich: Although the goal is to estimate future solvency, most factors considered by banks are past-oriented and primarily quantitative (ratios). Banks do not simply differentiate between good and bad risks. To assess a company's solvency, banks evaluate financial data from its balance sheet (liquidity, equity, etc.) and non-financial factors such as the quality of management and economic prospects.
What are the concrete steps for an SME to obtain its bank rating?
Dietrich: The company must provide financial documents, present a relevant business plan, well-designed future forecasts, and potential guarantees.
How can a company improve its rating?
Dietrich: Improving key evaluation indicators can help. For example, increasing equity, reducing debt, improving liquidity, managing costs effectively, providing guarantees, and producing professional reports.
In a past study, you found that only three out of ten Swiss SMEs that obtain bank financing know their bank rating. Why is this?
Dietrich: Generally, the financial knowledge of many small and even medium-sized SMEs is quite modest. They often do not know the quality or weakness of their rating, nor the ways to improve it—and therefore their credit conditions.
Do you have any advice for entrepreneurs facing this issue?
Dietrich: It is important to understand that a rating does not appear out of nowhere. Estimates depend on evaluations of various rating factors, corresponding weightings, and their selection, which varies from bank to bank. Therefore, it is beneficial for a company to obtain ratings from several banks. This better negotiating position can potentially lead to better interest rates.
Overall, it is worth understanding the measures that can improve the rating. While banks do not disclose their rating methods and weightings, researching online can quickly reveal which ratios play a central role in most banks' evaluations.
Informations
Biography
Andreas Dietrich is the director of the Institute of Financial Services Zug (IFZ) and head of the CAS Digital Banking program. He studied and obtained his doctorate at the University of St. Gallen (HSG), worked as a research associate at HSG, and spent a year researching at DePaul University in Chicago. He has been with IFZ since 2008. Additionally, he has been a board member of the Lucerne Cantonal Bank since 2015 and a member of the Swiss National Bank's banking council since May 2024.
Last modification 19.06.2024
