Credit Rating for Small and Medium Enterprises

Credit Rating for Small and Medium Enterprises

Have you ever been caught up in a financial fix and tried to apply for funding from a lending institution or rather a bank? Then instead of being given the loan, your application is ignored and you miss out the funds to drive your enterprise in the right perspective. You would realize that your loaner needs an understanding of the whole enterprise before agreeing to fund the business. As a result, annual credit rating of your business is very important as it renders the enterprise its efficiency and thus a better turnover and profits. You are only needed to identify a legitimate credit rating agency to carry out the rating for your business.

Small and Medium Enterprises (SMEs) usually face a big challenge when it comes to seeking for financial assistance from banks. The best option lies with a credit rating agency. In fact, research on SMEs indicates a low percentage of only 13% registered SMEs as having access to funds from the formal sources.

The role of a credit rating agency is to assess an enterprise’s financial viability and capability to keep to and honor the agreed business obligations and provide information on its sales, financial and operational composition. The rating entity will thus assess the risk situation and provide information on the overall business efficiency for your entity. The agency will still benchmark your business’ performance within its industry.

If you are keen enough during the rating, the rating agency usually award eight grades that range from 1 to 8. Grade 1 is the highest whereas grade 8 is the lowest. Based on your firm’s turnover ratio, the rating agency decides on fees to charge you. The validity of these charges takes one year before they are due for renewal again. If your business gets a good rating, for instance 1, there are high chances for your enterprise to be credited with a loan.

According to the Managing Director of the Small Industries Developmental Bank of India (SIDBI), Sunil Munhot a lot of information asymmetry exists in the market and a good rating would provide one with initial project confidence.

Usefulness of Credit Rating

Concessional funding: This funding will help you make a very fast gain in credit for your enterprise. With a good credit rating, you can even approach other banks for better rate bargain as compared to your usual banker.

Awesome Business Opportunities: Independence in evaluation of risks of SMEs by the rating agency with unbiased minds lends them credibility thereby opening up doors of opportunities in the corporate World. Private equity sources are also accessed easily once your rating is high. High ratings will boost your customer base with better terms.

Self-employment: The process of providing highlights of both strengths and weaknesses triggers self-correction. The regular ratings renewal improves the performance of your firm and builds confidence within the trading channel and lending fraternity.
Author: Naomy Fraser, – financial services.