Small and Medium Enterprises (SMEs) contribute a large chunk to India’s GDP. Providing employment to millions of people, this sector is one of the greatest driving forces of India’s economy. However, SMEs can often run up against problems when trying to obtain funding. Not only does this hinder the growth of the company, it can also have detrimental effects on our economy. With a credit rating, however, it becomes easy for SMEs to get a business loanfor growth and expansion.

What is the importance of credit rating for SMEs?

For SMEs seeking financing, credit rating is important. Credit rating agencies assess the firm’s financial viability to determine the risk factor associated with it and its overall health. In a nutshell, SME gradinggives potential lenders and investors information regarding these companies. Here is why the process of credit rating is important and what it means.

Builds credibility

Credit rating by a trusted institution such as CRISIL rating for SMEs offers lenders transparency and complete readability into a company’s financial health. The lender, then, can make decisions about loan disbursal, based on the repayment capacity of the company. Lenders prefer giving out loans to SMEs with a rating because of the information it encompasses.

Good reference document for lenders

A credit report offers deep insights into the operations and finances of an enterprise, including the strengths and risk factors associated with it. This reduces the need for an extensive background check by the lender to approve a business loan. Also, this reduces the time taken by the lender for loan appraisal as it gets all key information through the credit report.

Additional Read: Why Credit Score is Important While Availing a Business Loan

Better interest rates

Credit rating for SMEs also informs the lender about the risk factors involved in loan appraisal. The lower the risk factor, the more favorable the interest rates lenders can offer borrowers. Therefore, borrowing companies can enjoy lower interest rates with a good credit rating.

Better negotiating terms with suppliers

Having a credit rating has benefits for a company that go beyond obtaining a loan. Often, companies may need to buy supplies and raw materials on credit. With a good rating, SMEs have a stronger ground while negotiating terms with suppliers. A report made by an independent and trusted third party (credit rating agency) can be presented as proof of the company’s payment capacity.

Effective self-evaluation

A credit report highlights an enterprise’s strengths and weaknesses. Companies can take it as an opportunity to fix issues financially, boost profits, and channel funds in the right direction. Thus, a credit rating has a lot of value for a company’s strategic plans.

Additional Read: Know More about the Credit Rating Agencies in India and Their Types

To sum up

Tata Capital believes in extending complete support to Indian SMEs and becoming a true growth partner. To this end, we offer competitive SME loans with favorable terms and easy-to-meet eligibility criteria. Come to use for a smooth application process and quick loan disbursal.

Check your business loan eligibility at Tata Capital today and give wings to your dreams. Grow your business with funding from Tata Capital.

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