The current trend of successful small and medium-sized enterprises from South Africa aiming to expand into the rest of Africa has led to the importance of credit ratings and risk assessments being increasingly recognised, credit solutions provider Coface tells Engineering News.

Coface enables enterprises that have identified potential foreign trading partners to obtain credit and risk ratings on the foreign enterprises in which they would like to invest, as well as on the country in which they operate, thereby gaining a better understanding of unfamiliar business environments.

“Country risk ratings are not the same as sovereign ratings provided by other financial institutions, which assess a country’s government and its ability to fund debt. Coface provides a risk rating for a country in terms of its business operations, how the average business in a country operates and the risks, such as its ability to uphold credit agreements, associated with doing business with these foreign enterprises,” explains Coface lead analyst Saijil Singh.

This international service helps facilitate global trade and business partnerships. Credit ratings are important in facilitating trade between businesses, as there is greater transparency of the risks associated with a particular business venture when information, such as businesses sustainability, is made available.

If a South Africa-based enterprise’s credit rating information is up to date, Coface can immediately provide a potential foreign trading partner with information on the enterprise’s and the country’s risk and credit rating, helping to accelerate the facilitation of trade between these enterprises. In South Africa, a credit assessment of an enter- prise can be completed and made available within one to ten days, depending on the size of the enterprise or the requested credit facility, says Singh.

Coface’s core business service is providing commercial credit insurance for enterprises. The company’s insurance division requires credit risk ratings and analysis of business entities for local and international enter- prises that would like to use Coface’s credit expertise, he explains.

“Credit ratings are determined by various factors, such as the size of the enterprise and the industry in which the enterprise operates,” Singh notes, adding that factors such as trends and developments affecting an industry’s performance will also be assessed when determining an enterprise’s credit rating.

“There are, however, basic assessment methods that Coface applies when deter- mining an enterprise’s credit rating, such as determining a company’s ability to service its debts from a diligence and legal stand- point,” says Singh. The company will assess how quickly an enterprise can service its debts and whether legal action has been necessary to recover payment.

“Coface also considers an enterprise’s capacity by assessing the company’s financial statements to determine whether it can pay its debts,” he notes, adding that financial statements from smaller enterprises, such as sole proprietorships, do not have to be audited. A bookkeeper’s records, profit and loss sheet, or financial statements from banks are sufficient to determine a small enterprise’s cash flows and, therefore, its ability to service its debts.

Another factor involved is the value of the credit facility an enterprise requests, as small credit facilities do not normally neces- sitate stringent checks. With large credit facilities, Coface assesses whether an enterprise can service its debt and also if the enterprise is sustainable, which is determined by looking at the industry’s performance as a whole.

Further, a company’s partner agreements, such as the suppliers, who its debtors are and how many debtors it has, also play a role in determining whether an enterprise is sustainable in the medium term. By having a greater number of debtors, a supplier can spread its capital and limit its risk in the event of nonpayment by a debtor.

The information received allows credit providers such as Coface to give enterprises a credit rating of between one and ten. These ratings determine the credit facility an enterprise is eligible for and the size of the credit facility a credit provider is willing to offer.

Coface offers enterprises an advisory service to help improve credit ratings by identifying the factors involved in deter- mining the current rating. This service is extended to the debtors of the company’s clients, which will be monitored, advised and assessed over 12 months to determine if they are capable of managing a credit agreement. An improved credit rating and credit facility will follow, if Coface finds that these enterprises can manage their current credit agreements, Singh notes.

He says Coface actively assesses the quarterly financial statements of large blue-chip-listed companies to determine and update their credit ratings. Also, Coface visits these companies yearly in view of the scope of the credit facilities they receive.

However, smaller companies receive credit ratings only on request. The ratings are valid for three months and any supplier requesting the information will receive the credit rating completed during this period. Coface will not perform a new assessment if a company has a valid credit rating.

Singh notes that much of the information that Coface uses to perform these assessments is confidential and is not available to third parties. Only the information pertaining to legislative and statutory requirements, such as a list of the board of directors and the number of employees of an enterprise, is made available.