How to Deal with the New Rating Culture – A Practical Guide to Loan Financing for Small and Medium-Sized Enterprises

This guide, aimed at anyone concerned with financing of SMEs, begins by highlighting that banks have traditionally been the main source of funding for SMEs. In recent years, however, banks have been changing their approach to the lending business. It is noted that the evolution of risk management, alongside structural changes, has induced banks to pay more attention to measuring and managing their credit risks and their capital adequacy with respect to such risks. The resulting developments are relevant to SMEs.

Banks are looking more and more closely at the capacity of their borrowers to pay back loans. Banks’ assessments of the risks associated with loans are increasingly related to the characteristics of the individual borrower. These are summarised through the ‘rating systems’ into a ‘rating’. Banks use these systems to identify the different individual risk levels of their loans and ensure that they earn a return appropriate to the risk they take.

The guide asserts that SMEs will face more significant changes than larger corporations. It argues that SMEs will be internally assessed (or rated) more and more thoroughly by banks, even when applying for small loans. As such, SMEs are likely to encounter a widening range of credit prices and overall borrowing conditions. This guide aims at giving SMEs practical advice on how to adjust proactively to the ongoing changes in the credit process in order to benefit from the potential advantages and minimise any possible disadvantages from banks’ greater focus on risk.

The guide is divided into three chapters:

  • Chapter 1 explains the ongoing developments in the banking industry, including recent regulation, and gives some insight into how the SME lending business will evolve over time
  • Chapter 2 describes banks’ credit processes and current changes relating to them with a particular focus on what ratings are, how banks use them now and in the future
  • Chapter 3 offers SMEs a set of basic rules for dealing successfully with banks on credit matters in the evolving financing environment and illustrates the key advice with an imaginary case history

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