How Credit Ratings Can Increase Access to Bank Loans and Financing for SMEs

What is the vision behind CreditBPO and the SME Credit Rating Report?

Lia Francisco: CreditBPO is really an initiative of ours where I’ve put together my experience as both a banker and a business owner. In an emergent economy such as ours, the Philippines, small and medium enterprises really face a lack of access to credit, bank loans, and financing in general. We believe this is mainly because of the asymmetrical information that presents itself both to the banks and to the small and medium enterprise owners.

In other words, the information that the bank wants in order to make a good decision, a good credit decision whether or not to lend to an SME, is just not available. So, we’re working off of that and trying to put a new perspective in addressing the asymmetrical information. We believe small and medium sized businesses should know what they look like, should know their own credit profile, and should know their own credit risk rating.

What CreditBPO does is that it makes known to the SME that all that the SME does and is relates directly to their credit rating. It’s not a very widely held belief that what an SME owner does and how he manages his company has a direct impact on the credit rating that he has. That is an important reason as to why keeping accurate financial records is not a widespread practice among SMEs. CreditBPO’s service will make an SME realize what he looks like to potential lenders from a credit perspective.

From there, and with our recommended actions, they can now proceed in doing whatever they need to do in order to improve their credit risk rating. We provide the SME with its credit risk rating taken from data obtained from both conventional and non-conventional sources as well as intimate company data, and we run this through our proprietary software in order to generate what we call the CreditBPO Rating Report which contains the SME’s credit risk rating and, perhaps more importantly, actionable recommendations specific to their company. These recommendations can improve the SMEs access to bank loans and other financing solutions.

What challenges do SMEs have in regard to access to credit and financing?

Lia Francisco: Several studies have been made showing that SMEs have very little access to credit and financing. Only about 10% are banked. So what we’re trying to do is put forward a real solution for the 800,000 or so SMEs here in the Philippines.

The SMEs have very limited access to credit and financing primarily because what the banks require, the SMEs are just not able to give. Primarily, many SMEs don’t realize the importance of business metrics, of actually measuring performance or keeping accurate records, or documenting vital information about their industry or about their operations.

Once the SME realizes that he needs to engage in best practice as far as putting together business information, as far as constantly recording and monitoring his operations, once he sees that – and the only way he can see that is when he sees himself in the CreditBPO SME Rating dashboard – once he sees that what his creditworthiness looks like is really the result of how rigorous he has been in implementing best practise in enterprise planning, actual results management, and financial reporting, then he will realize their true value. There will no longer be a mistrust on the bank’s side when it comes to financial reporting from SMEs. Access to credit will improve and with it the potential for securing a bank loan or other financing arrangement.

How does credit worthiness change financing options for SMEs?

Lia Francisco: When an SME improves its credit worthiness, whether for existing operations or for future expansion, the options for financing grow significantly. While before he might have only had access to money from family, from friends, or from his credit card for example, with an improved credit rating he would be able to access more capital from formal financing institutions such as banks. Additionally, a more favorable credit rating will give him the opportunity to borrow at lower interest rates. So this obviously lowers his cost of doing business and makes more funds available for other core operations or initiatives that the SME can pursue.

Several studies have been made showing that SMEs have very little access to credit and financing. Only about 10% are banked. So what we’re trying to do is put forward a real solution for the 800,000 or so SMEs here in the Philippines.

How active are banks in the Philippines in extending loans to SMEs?

Lia Francisco: SME lending is really very scant. Bank lending to SMEs leaves much to be desired, and it’s really because of the credit information infrastructure. The challenge here is for the banks to look at the SME in a different way, mainly because of the credit rating information that hopefully we’ll be able to provide. All in all, the growth of the SME sector has lagged behind the overall national GDP growth. Growth has been 3% in the SME sector versus 6-7% in the overall GDP. So you can see that there is still a long way to go for bank lending to SMEs.