Is the company likely to go bankrupt? – Innovative credit rating model assesses SMEs
The Nousu Rating was developed by Professor Emeritus Erkki K. Laitinen and Professor Teija Laitinen at the University of Vaasa, who are well known for their research on bankruptcy and default prediction. The Laitinens have created several statistical models that are used by companies and organisations to predict insolvency and bankruptcy.
– Our student had mentioned us to Nousu Capital, whose CEO made a request for the model. The company wanted a comprehensive model with both qualitative and quantitative variables, says Teija Laitinen.
Access to external financing has become more difficult
Access to funding can be a challenge for small and medium-sized enterprises. Traditional financial institutions often focus on larger companies, leaving SMEs without the support they need.
According to the latest Finnish SME Barometer, published last autumn, access to funding for SMEs has become tighter since the spring due to strict banking regulations and the weaker creditworthiness of SMEs. A large number of growth SMEs are at risk of having shortages of funding in their most critical growth phase.
SMEs have therefore started to look beyond banks to other providers and forms of finance.
– Venture capital, for example, can be an option when banks are unable to provide loans. But even many venture capitalists are reluctant to invest if the company is in a bad financial situation, says Teija Laitinen.
It is therefore important for investors to be able to measure and predict the risk of bankruptcy. The model developed by Erkki K. and Teija Laitinen examines quantitative data on the SMEs, such as profitability, solvency, and liquidity. This hard data can be used to evaluate a more established SME, but for a start-up, other tools are needed.
– For start-ups, there is no history or financial statement data, so qualitative variables are needed. These include management characteristics and industry characteristics, says Professor Emeritus Erkki Laitinen.
"The model has given reliable results"
Nousu Capital is a Finnish financial advisory firm that provides specialised services to SMEs seeking loan and equity funding. The Nousu Rating credit model was launched in 2017, and over the years, many SMEs have benefited from the credit rating to obtain financing. The model has also helped many investors find good investment opportunities.
– The model has been very effective and easy to understand. It has provided reliable results. We are particularly pleased that the model takes into account the company's performance forecasts, says Seppo Kankaanpää, CEO of Nousu Capital.
According to Kankaanpää, the model is still in active use at the company.
– We provide expert advice to our customers on financing arrangements, and the Nousu Rating allows us to evaluate the customer's creditworthiness in a reliable way.
According to Erkki K. Laitinen, the model has been updated from time to time. Additional features have also been added.
– We constantly test the model. It allows us to achieve a very high level of accuracy.
At the same time, he points out that no model can predict one hundred per cent correctly. This is due to factors that cannot be foreseen.
– The death of the CEO, the divorce of an entrepreneurial couple, the repeated injection of money by the owner of a bankrupt company are just a few examples.