The coming into effect in January 2007of the directive on the Basle II Agreement, and the proposal for a review of the latter in the light of the financial crisis, have obliged the banks to review their lending policies. Indeed, the Basle II agreements envisage a more drastic policy with regard to own funds. Thus, the riskier the loan, the greater the amount of own funds that the bank is required to keep. In view of the fact that a lack of liquidity due to the low level of own funds was one of the factors that was aggravating the crisis, it is certain that these rules are going to be made more severe..
However, the reinforcement of their own funds by the banks will without any doubt influence their lending policies with regard to SMEs.
There are two important messages for SMEs:
1. Ask your bank for sufficient information before and during the loan contract. The following question is important: Which rating system does the bank in question use, and what are the components that determine your risk class? Your risk class determines the bank's decision to lend, and the borrowing cost. Although all rating systems take into account the same basic factors, most banks have a unique rating system with a unique number of risk classes. So two different banks can rate the project you are trying to finance differently with a different borrowing cost as a result.
2. During and after the submission of the project to be financed, it is important that you always provide the bank with as much relevant information as possible. Pay attention to the project feasibility, and proper reporting of the realistic financial data.
Every SME customer will receive a credit score (= rating made by the banks) which is amended every year. Your rating history will also determine your borrowing cost in the future. Not repaying your loan on time can have consequences for both the near and distant future. If you are facing financial problems, go to the bank and talk about it.
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