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, but it can also have detrimental effects on our economy. With a credit rating, however, it becomes easy for SMEs to get a business loan for 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. Additionally, they assess its performance against others within the industry.
In a nutshell, SME grading gives potential lenders and investors information regarding these companies. Here are the benefits of credit rating for SMEs.
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.
Thus, the important advantage of credit ratings for SMEs is that it creates a complete picture for the lender.
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.
And since it reduces the time taken by the lender for loan appraisal as it gets all key information through the credit report, the chances of getting a loan approved soon gets higher.
Additional Read: Why Credit Score is Important While Availing a Business Loan
Increases the visibility
Another benefit of credit rating is that SMEs become more visible. Ratings, which represent a third party’s assessment of creditworthiness, support instilling confidence in lenders and other stakeholders. With higher credibility, SMEs can access capital from sources that would otherwise be reluctant to lend.
Better interest rates
Credit rating for SMEsalso 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.
So investing time in obtaining credit and performance ratings from a reputable and accredited independent rating firm is worthwhile.
Better negotiating terms with suppliers
Having a credit rating has benefits for a company that goes 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.
For SMEs, a credit rating is akin to a report card. As a result, another benefit of credit rating is that it stimulates self-correction by highlighting 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.
Regular rating renewals assist a company in performing better and increase trust among lenders and the trading channel. Thus, the benefits of credit rating are a lot and have 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
Credit ratings can potentially transform how SMEs are integrated into the financial system. First, however, the credit rating agencies must take the reins and drive measures like starting outreach programs and educating the SME sector about the advantages of credit ratings.
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.