What are the benefits of a credit rating for SMEs? | SupportBiz

Managing Growth

What are the benefits of a credit rating for SMEs?

There are several agencies that provide credit ratings to SMEs in India – SME Rating Agency of India (SMERA), ICRA, Credit Analysis & Research (CARE), Crisil Ratings, Fitch and Onicra are some of them. For a reasonable fee, these agencies study various aspects of an SME, such as its financial viability, turnover, risks attached and its capabilities to fulfill its business obligations, based on which a rating is provided to it.

Commonly, this rating ranges between 1 and 8, with 1 being the highest rating and 8 the lowest. This rating is valid for a period of one year, post which the SME needs to get its rating renewed by the same or another rating agency.

Credit rating by an external agency offers several benefits to an SME. SupportBiz lists the major ones.

  1. It serves as a stamp of quality.

A credit rating by a renowned agency like ICRA or Crisil serves as a stamp of quality for an SME. When an agency accords an SME a high rating, it adds to the value of the SME, communicating to investors and other third parties that the SME’s capabilities are worth being trusted. It is a trusted, unbiased third-party opinion about an SME. A good rating, thus, provides confidence about the capabilities of an SME to various third parties, allowing them to place implicit faith in its credibility. Hence, third parties find it easier to deal with such an SME.

  1. It serves as a tool for self-improvement.

A credit rating gives an SME a fair idea about its capabilities and weaknesses. Most credit rating agencies offer SMEs, along with the rating, detailed analytical reports on the positive and negative aspects of its operations. A rating, thus, serves as a tool that can inspire an SME to overcome its weaknesses and capitalise on its strengths, to measure its own improvement over time. It serves as a benchmark to measure where a particular SME stands in the industry.

  1. It offers improved visibility.

Several credit rating agencies offer rated SMEs a free listing on their websites, newsletters and other publications. These publications are often used by banks as a reference for making lending decisions, thus offering rated SMEs wider visibility.

  1. It provides valuable feedback.

Most credit rating agencies provide feedback to SMEs on the various issues that they are facing, guiding them on how to overcome these issues. This feedback can be quite valuable to an SME, providing it with an opportunity to implement best practices and constantly work on improving itself.

  1. It aids in obtaining various governmental benefits.

The government commonly favours rated SMEs over non-rated ones. There are several governmental schemes available to rated SMEs. The government also restricts certain contracts only to SMEs which have been rated.

  1. It provides better access to concessional funding.

Many credit rating agencies have tie-ups with banks and financial institutions to offer them funding at a concessional rate of interest. Thus, rated SMEs get better access to concessional funding, vis-a-vis non-rated ones. Also, if an SME receives a good credit rating, it can approach banks and financial institutions to obtain a better rate of interest than that offered by its existing fund provider.

  1. It brings better business opportunities.

A credit rating by an external agency improves the credibility of an SME in the eyes of MNCs and other corporates. Good ratings enable SMEs to approach MNCs and corporate with their tenders and other business offers, thereby opening the doors to better business opportunities. Similarly, SMEs which have good credit ratings can negotiate better terms with their suppliers and customers, and are able to retain them in a better manner. 


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