When a company applies for financing in Québec, the financial institution will evaluate its capacity to pay in order to determine its creditworthiness. The result of this analysis is referred to as the risk rating.
The risk rating is determined using a template that takes a variety of factors into account. Thus, the bank will consider the company’s historic financial ratio compared to other companies in its activity sector, the company’s capitalization, its business sector and its position compared with its competitors.
The quality of the management team and issues the company may have dealt with in the past—such as a payment default, labour conflict, or legal action—are also taken into consideration.
The risk rating takes administrative and human elements into account to obtain as accurate an overview of its situation as possible.
Tips to improve creditworthiness
By knowing exactly what banks will be taking a look at to determine creditworthiness, it is possible for a company to direct its strategy to improve its rating.
Here are a few examples:
- maintaining a satisfactory sales level;
- managing cash inflows and outflows in a satisfactory manner and maintaining sufficient working capital;
- deploying a sound strategy to reinvest profits in the business;
- Ensuring compliance with regulatory requirements.
It should be noted that financing may still be possible even if a company has a relatively high risk rating. However, the level of securities required may be higher—and could include personal securities in certain cases.
Do not hesitate to set up an appointment with a financial advisor at a financial institution—he or she can get your file set up and guide you through the process.