Small and Medium Enterprises are playing more and more important role in world economy development. Especially, Indian SMEs has gained rapid development in recent years. However, financing difficulty is a predominant and common problem for the SME’s in India. One of the solutions is to establish a credit rating method which can help SME’s to access finance. Brickwork is committed to help the SME sector by offering ratings.

The unique characteristics of SMEs, which are broadly identified by low capitalisation, limited recognisable assets, geographical diversity (cluster behaviour), short business lifespan, poor access to capital markets, huge cash intensity in transactions, absence of dependable credit information/history and other internalised issues of promoters, to enable reasonably good credit decisions, poor financial disclosure on tax and other business issues, high credit risk perceptions coupled with high borrowing cost, low concentration on financial and non-financial activities and slow acceptance of changes through technology-based solutions.
Hence, the following qualitative characteristics to define an SME:

• Strong links between the entity, the owner, and the owner's family.
• An organizational structure that features owner management, or the owner or the owner's family members, on the supervisory board.
• An organizational structure with historically close relationships between management and employees.
• Existing funding availabilities that are based predominantly on bank facilities and loans.
• Limited or no access to the equity or capital markets.
• Limited financial flexibility due to restrictions in the company's capacity to raise new equity. Most owners have only limited capital resources to support capital increases, or may be unwilling to provide support.

Brickwork SME rating criteria includes five main categories: Financial Conditions, Characteristic and Perspective of the product, Operation Risk and Competitive Strength, Management Measure and Conditions of Industry of evaluated SMEs. Every main category also includes several sub-criteria as follows: 

1. Financial condition

• Liquidity ratios
  • Quick ratio
  • Current ratio
• Leverage ratios
  • Times-interest-earned (times)
  • Total debt to assets (percentage)
  • Debt to equity ratio (Percentage)
• Profitability ratios
  • profit margin (Percentage)
  • ROS, i.e. return on sales (Percentage)
  • ROA, i.e. return on assets Percentage)
  • return on net assets(Percentage)
  • ROE, return on equity (Percentage)
• Efficiency ratios
  • Inventory turnover (time)
  • Receivable turnover (time)
  • Assets turnover (time)
• Development Ability
  • average sale growth rate during the last three years (Percentage)
  • conditions of capital increment during the last three years (Percentage)
  • total profit growth rate (Percentage)

2. Characteristic and Perspective of the products

• product marketability
• product market share
• product perspective

3. Operation Risk and Competitive Strength

• Operational Risk
• Technologies and R&D ability

4. Management Measure

• administrator's personal credit management experience and knowledge structure
• integrity and perfection of management system
• shareholder / organisation structure type 

5. Conditions of Industry

• Macro-industry policies
• industry risk in the next year
• economic condition prediction in the next year
• Investors, and company management teams, often assume that absolute size - measured in revenue, assets, cash flow, number of employees, or market capitalization is used as a discrete rating factor when assessing credit risk. This is not the case. There is no minimum size criterion for any given rating level, as size alone does not constrain a company's rating. Smaller entities are only considered to be at a greater risk when their size exacerbates any weaknesses relative to competitors or where it implies a degree of vulnerability to business or financial adversity.
• The industry in which a company operates, together with the company's competitive position within that industry, are key factors in assessing business risk. This in turn determines the level of financial risk appropriate for a rating category. The analytical focus centres on the company's relative operating strengths and weaknesses in both its industry and markets, and whether or not its financial profile mitigates or aggravates these risks. Areas of key analytical concern, including a company's size, are determined by the industry success factors, along with any aspects of vulnerability affecting the industry or issuer.
• Certain issues such as a high dependence on only one major production facility or market, or a limited number of customers - characteristics common to small and midsize enterprises (SMEs) - could also affect credit quality, even when this dependence underpins the company's high degree of success.
• Poor financial flexibility is usually an negative rating factor for SMEs because of their limited capacity to withstand unexpected setbacks, and their limited access to external cash debt or equity to cover near-term vulnerabilities or temporary cash shortfalls. Adverse developments that would be a setback for firms with greater resources could result in severe problems for an SME's performance, possibly leading to its demise if access to funds is restricted.
• Larger firms generally have substantially more staying power and often benefit from the extended support of key stakeholders in times of stress. This can serve as a platform from which the company can launch new products and services and thereby thrive. In contrast, the promise of small firms can fade very quickly, and their relatively small equity bases provide little protection from financial distress, especially against the high debt burdensome companies deliberately assume.
• Fast growth often is pursued at the expense of profitability, and often is subject to poor execution, even if the idea is well conceived. 

Brickwork criteria for SME rating have the following two key features to differentiate from criteria of other categories. They are:

1. Brickwork offers rating of issuer and not specific to the debt issues.
2. Brickwork ratings for SME’s are valid for one year only from the assigned date, as the rating is not linked to specific debt issue / maturity period. In case of renewal, Brickwork team will conduct the rating review and assign the rating again based on the fresh / additional information provided by the SME.

Brickwork has adopted a separate rating scale for SME’s and the same may be referred in the Rating scale document.