A company’s creditworthiness determines its access to credit

• The creditworthiness of German small and medium-sized companies (SMEs) visibly recovered after the financial crisis
• The proportion of companies with poor credit ratings nevertheless grew
• A company’s creditworthiness has particular impact on banks’ lending decisions
• Companies should ensure that their creditworthiness is good, even when financing conditions are excellent

The economic and financial crisis of 2008/2009 was a stress test for German SMEs and was accompanied by a deterioration in the solvency of several companies. Almost eight years later, Germany’s SMEs have visibly improved their financial standing and are now far more resilient to fresh crises. These are the results of a recent, representative study by KfW Research and Creditreform. The study also shows, however, that the increase in average creditworthiness masks a rise in the share of companies with a weak or very weak financial standing. Today’s favourable economic situation nevertheless constitutes a good precondition for reducing the number of endangered companies with poor credit ratings.

Larger SMEs with more than 50 employees in particular were able to capitalise on the economic recovery that followed the crisis years and improve their creditworthiness considerably. The share of companies with excellent or very good creditworthiness rose by a considerable 7.5 percentage points in this segment between 2009 and 2014. “A vast number of SMEs used the good years following the crisis to accumulate equity capital and improve their liquidity. This makes them more resilient and improves their solvency,” according to Michael Bretz, Head of Economic Research at Creditreform. At sector level, developments in construction, trade and R&D-intensive manufacturing were particularly positive. In these economic segments there were far more (3.4, 3.8 and 3.8 percentage points respectively) companies with high credit ratings and fewer companies with poor ratings (2.1, 1.0 and 1.2 percentage points respectively) in 2014 than at the height of the crisis in 2009.

In addition to this general positive trend, however, there are also critical developments. The share of companies with a weaker or much weaker creditworthiness rose in particular among small SMEs with less than 10 employees, as well as in the service sector and in other manufacturing segments. At the end of 2013, the creditworthiness of almost 9% of small companies was inadequate. By 2014, this proportion had been reduced by the favourable economic situation, but remained high at 7%.

“Weak company creditworthiness can be dangerous as it largely determines access to bank credit,” notes Dr Jörg Zeuner, Chief Economist of KfW Group, with regard to the results of the study. In times of crisis, above all, companies with a weak financial standing feel the scaling down of the credit offering particularly keenly, as established by KfW Research and Creditreform through statistical analyses. Overall, however, SMEs with a poor financial standing benefited from positive changes in the financial environment following the crisis. Their access to bank credit improved considerably. Nevertheless, this should not offer cause for complacency. “Creditworthiness is and remains a central factor in the credit decisions taken by banks. SMEs should not lose sight of this, even in times of easy access to bank credit. Stronger creditworthiness will help German SMEs to overcome future crises and act as a supporting pillar to the German economy.”