Frontpage News 2014 Bank loans are usu...

Bank loans are usually granted to solid companies

17 November 2014

​Week 47: A rejection in the bank does not last forever. Within a few years, many companies are able to improve their solvency and thereby increase their credit rating. This is evident from the Danish Bankers Association’s new figures concerning small companies’ access to loan finance.
When companies apply for bank loans, the outcome of a credit rating depends partly on the company’s financial health, including the ability to repay the loan.
An important element of this assessment is the company owners’ investment in the project, so the company is able to bear potential losses. This is measured in terms of the company’s solvency, which expresses the equity’s share of the company’s balance.
A former survey of Danish SMEs conducted by Statistics Denmark shows that the outcome of loan applications is affected by the loan applicant’s solvency.
Outcome of loan applications from small companies
Source:   Statistics Denmark and the Danish Bankers Association’s calculations.
Note: Figures are based on 188 companies with 5 to 9 employees, which applied for loan finance in 2009/2010. The study covered a sample of about a fourth of the SME segment. Solvency is calculated for 2009. The four quartiles divide the companies into equal fourths based on solvency, where Q1 covers the companies with the lowest solvency and Q4 the companies with the highest solvency.
Consequently, 55 per cent of the smaller companies with the lowest solvency have success with the loan application, while over 70 per cent of the companies with the highest solvency obtain financing, see figure 1. The conclusions are consistent with the National Bank of Denmark’s previous analysis of the data set.

Bank rejections can be a catalyst for consolidation

The Danish Bankers Association has made new calculations, which analyse the companies from the study in the period before and after the loan application in 2009/2010. The calculations show that the companies, which received a rejection, were severely afflicted on the solvency, cf. figure 2.
Development in solvency for loan applicants
Source:   Statistics Denmark and the Danish Bankers Association’s calculations.
Note: The calculations cover the companies included in figure 1.
The companies that experienced difficulties with obtaining loan finance in 2009/2010 were challenged in the period 2007-2009, where the solvency decreased from about 20 per cent to approx. 7 per cent. It is very likely that the major decline has made it difficult to become credit approved in the bank.
Furthermore, the figures show that the same companies consolidated substantially in the period following the loan application and up until 2011. In 2011, the companies had a solvency on level with the group of companies, which had successful loan applications in 2011/2012.
Nevertheless, the solvency of the rejected companies decreased in 2012. It is difficult to identify the exact reasons. However, since these companies were severely afflicted by the financial crisis’ first wave in 2008, it is not unlikely that the same cyclical sensitivity has been the decisive factor of the second wave of the crisis in 2011/2012.
This might have been influenced by different factors, such as a high exposure to the real estate market, industries experiencing difficulties, or that the companies only sell to neighbouring markets.
The companies can thereby still experience difficult credit terms, if they have weak key indicators. However, the development shows that the companies are able to consolidate within a relatively short time, and thereby obtain more financing options.
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