Interpreting the Results from the SmallBiz Credit Risk Assessment Tool How Can the SmallBiz Tool Help You? Access to capital is important to managing and growing your business. Moody s SmallBiz Credit Risk Assessment Tool can help you understand the factors that potential lenders may review when evaluating your credit profile. Moody s SmallBiz Credit Risk Assessment Tool is powered by Moody s Analytics RiskCalc TM, the industry-leading model for measuring the credit default risk model of private companies. This tool helps small business owners: Quickly understand the credit standing of your business. Gain insight into the factors that drive your business risk and how you can improve them. Obtain a customized credit report to understand the factors that lenders may review when evaluating your credit standing. Moody s SmallBiz Credit Risk Assessment Tool is designed for use in accordance with the following guidelines and is not intended for use outside these parameters: For use by small businesses operating in the United States only. For use by small businesses that generate $100,000 or greater in annual sales. For use by small businesses to assess the credit risk of their own business, not the credit risk of other entities. For use by small businesses that have independent financial statements that are not commingled with the owner s personal financial information (i.e. not intended for use by sole proprietorship entities). Not for use by nonprofit, project finance, real estate, municipals, or insurance entities. Understanding the Results After you enter your company s financial statement data into the SmallBiz Credit Risk Assessment Tool, you receive a number of useful results. You can use these results to better understand your company s credit risk. In addition, these results can provide guidance about changes you could make that may decrease risk within your company. The key metric from the SmallBiz tool is the SmallBiz Score. This score will help you understand your business s current credit standing, and is based on factors similar to those that many banks and lenders may review in conducting their own credit assessments. In addition, you will receive explanatory measures such as Relative Contributions and Copyright 2010, Moody's Analytics, Inc. and/or its licensors and affiliates. All rights reserved.
Percentile graphs to help you understand the key drivers of your credit risk. All of these are explained in greater detail below. What is the SmallBiz Score? The SmallBiz Score is a measure of risk created by the SmallBiz Credit Risk Assessment Tool by combining inputs from your financial statement with an adjustment for the industry in which you operate. The score provided is based on the probability of a company with the financial metrics you entered defaulting within a one year period. The SmallBiz Credit Risk Assessment Tool takes the financial statement inputs you enter (from the Income Statement and Balance Sheet) and uses them to create a probability of default, or Expected Default Frequency TM (EDF) credit measure ranging from 1% (very low risk) to 35% (very high risk). This probability is then mapped to a SmallBiz Score category (range 1 10). Banks may consider similar financial statement inputs as part of their credit assessment when a small business owner applies for a loan. SmallBiz Score Range The SmallBiz Score ranges from 1 (very low risk) to 10 (very high risk), and is based on the percentage chance of a company defaulting within the next year. Table 1 lists the probability of default ranges corresponding to your score. Table 1 The SmallBiz Score Mapping Scale Probability of Default (EDF) SmallBiz Score Lower Bound Upper Bound 1 0.01% 0.23% (Least Risky) 2 0.23% 0.32% 3 0.32% 0.48% 4 0.48% 0.73% 5 0.73% 0.97% 6 0.97% 1.13% 7 1.13% 1.18% 8 1.18% 3.08% 9 3.08% 5.77% 10 5.77% 100% The SmallBiz Score represents the percentile of risk, shown in Figure 1. A score of 1 is on the bottom percentile in terms of risk (least risky), while a SmallBiz Score of 10 represents the top percentile in terms of risk (most risky). The lower the number on the SmallBiz Score mapping scale of 1 thru 10, the less the probability of default risk. Copyright 2010, Moody's Analytics, Inc. and/or its licensors and affiliates. All rights reserved. 2
Figure 1 The SmallBiz Score Range Relative Contributions Graph The Relative Contributions graph, shown in Figure 2, illustrates how each ratio in the model impacts the SmallBiz Score for the data you entered. Figure 2 Relative Contributions Graph The Relative Contributions Graph is generated by the tool based on the financial inputs provided. The ratios listed in the graph above are the core ratios used by the SmallBiz Credit Risk Assessment Tool to create your SmallBiz Score. A ratio represented in green contributes positively to your SmallBiz Score. On the graph this means the performance of your company, as measured by that ratio, is helping create a less risky SmallBiz Score. A ratio represented in red contributes negatively to your SmallBiz Score. On the graph this indicates that the performance of your company, as measured by that ratio, is causing a more risky SmallBiz Score. If you focus on improving financial performance in the ratios that cause increased risk (in red), you can improve your overall SmallBiz Score. Percentile Graph The Percentile graph allows you to quickly assess the problematic ratios for your company. As shown in Figure 3, each horizontal bar represents the ratio labeled on the left. The column on the right gives the value of the ratio. The percentage number within the horizontal bar graph represents the percentile of the ratio within the development data sample set used to build the model (Example: Copyright 2010, Moody's Analytics, Inc. and/or its licensors and affiliates. All rights reserved. 3
49.65% of the development data sample had Sales Growth less than 8.08%). The shading represents the risk level associated with the ratio: green is low risk, red is high risk, and grey is neutral risk. The variables shaded red to green represent ratios where a higher value is associated with lower risk. Variables shaded green to red represent ratios where a higher value is associated with higher risk. Variables shaded red to green to red represent ratios where high and low values indicate high risk, while moderate values indicate low risk. Figure 3 Percentile Graph Each ratio is interpreted in a different manner. The information below will help you interpret your ratios: Cash/Assets: For this liquidity ratio, the higher the value, the less risky the SmallBiz Score. Cash Flow/Interest Expense: For this debt coverage ratio, the larger the ratio, the less risky the SmallBiz Score. Retained Earnings (RE) RE/Current Liabilities: For this leverage ratio, the larger the value, the less risky the SmallBiz Score. Size Ratio, Total Assets: For this size ratio, the larger the ratio, the less risky the SmallBiz Score. Return on Assets (ROA), Change in ROA: For these profitability ratios, the higher the value, the more profitable the company, the less risky the SmallBiz Score. Change in AR Turnover: This activity ratio is U-shaped, indicating that large positive or large negative values increase the SmallBiz Score. When the ratio is more stable, this makes the score less risky. Sales Growth: This growth ratio is U-shaped, indicating that large increases or decreases in sales causes a more risky SmallBiz Score while more stable sales growth creates a less risky SmallBiz Score. Leverage Ratio, Long Term Debt (LTD)/(Net Worth + LTD): For this leverage ratio, the larger the value, the more risky the SmallBiz Score. Current Liabilities/Sales, Inventory/Sales: For these activity ratios, the higher the value, the more risky the SmallBiz Score. Copyright 2010, Moody's Analytics, Inc. and/or its licensors and affiliates. All rights reserved. 4
Understanding Your Business Risks To better understand your business and how various financial inputs can drive your credit worthiness, you can use the SmallBiz Credit Risk Assessment Tool to run various scenarios. For example, you can increase cash or decrease liabilities and view your projected score under this scenario. This analysis may help you determine what areas of your business could improve your credit standing. For example, if you are planning a new or expanded business, you can use this tool to evaluate the credit risk of a business plan by entering projected financials and running side-by-side analyses under different scenarios. For additional questions regarding the Moody s SmallBiz Credit Risk Assessment Tool please contact clientservices@moodys.com Copyright 2010, Moody's Analytics, Inc. and/or its licensors and affiliates. All rights reserved. 5