New SME rating tool to ease small firms’ access to credit

However, they face acute shortage of capital and depend heavily on other sources for funding other than MFIs to provide huge financing to exploit their growth potential.   

Nevertheless, SMEs that have managed to get their credit applications approved have had to pay thigh interest rates charged by their lenders to cater for the risk components while majority have had their applications turned down.

This current situation is similar to what characterised the Japanese financial market back in the years before Standard & Poor’s, the leading global provider of independent research and ratings launched an SME ratings concept in 2005.

The new ratings service focused on the SMEs to enhance their access to credit facilities from financial institutions.  

Today in Kenya, the concept is slowly taking shape with commercial banks eyeing the SMEs market but still scared of the perceived risk.

Local Credit Rating agencies like Metropol East Africa Ltd have developed an SME rating product in the market for the benefit of both the SMEs and the commercial banks seeking to do business.

The SME ratings will help financial institutions with benchmark to use in their credit analysis and lending to SMEs.

This will give them the leverage to explore the potential of SME lending without restricting themselves to the long-held prescribed criteria and lending norms that only suits corporate customers but lock out the SMEs market.

For SMEs, the ratings offer a chance to demonstrate their financial strength and their credit worthiness to the financial market, paving the way for their access to capital and debt market including trade credits.

Business growth

Beyond obtaining access to credit, SMEs rating experience will give the SMEs the insight on their strengths and weaknesses and provide opportunities to enhance their competitiveness in their business growth.

In addition, the rating exercise, which has a component of business evaluation, will equip the SMEs with proper understating of fundamentals of operation and marketing, besides enlarging their managerial skills and best practices in doing business.

The rating exercise exposes the overall health of SMEs in terms of how the business will face competition and what strategies to take to keep afloat in the growth trajectory.

Projected financial performance anchored on strong business fundamentals backed by cash flow statements will form the key indicators of the SMEs creditworthiness.

Soon ,with the adoption of the SME rating in the lending market, the SMEs will be able to exploit their ratings by showing their credit information that in turn will help them to negotiate with potential lenders on loan pricing.