Challenges

The low financial literacy of small and medium-sized enterprises is one of the biggest challenges we face when addressing the market: credit ratings (and their benefits) are either unknown by the companies or are perceived as a product reserved specifically for large companies and sovereigns, with a very high price and few advantages for smaller companies, which are unaware of their usefulness in accessing different kinds of financing.
Companies are also reluctant to pay for a service that they believe may harm them if the final result (the notch) is not satisfactory, usually by comparing it with that of other countries or multinationals (investment grade vs non-investment grade differentiation), when in reality companies would benefit more from having a credit rating, even if it is a non-investment grade (i.e.: BB) since the asymmetry of information surrounding SMEs punishes them even more than having a lower rating.
Lastly, credit ratings are a standard in the more sophisticated capital markets, to which smaller companies usually do not have access. Since it is not a requirement to access financing, these companies rarely demand a rating voluntarily.

Primary target

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Description of Innovation

Inbonis has been an ESMA-authorized credit rating agency since 2019 and has been providing credit ratings to SMEs in Europe since then. Credit ratings comprehensively analyze the reality of a company to assess its ability to meet its future payment obligations.
Inbonis is the first agency to have a methodology and processes specifically designed to analyze SMEs and midcaps, democratizing access to credit ratings both in terms of price and time and offering a quality service tailored to the specific characteristics of these companies.
To achieve so, Inbonis created Refocal™. Refocal™ is a registered system, fully developed by Inbonis, that is compliant by design and has been approved by ESMA. The
software captures human intelligence in a structured way and reduces the analyst's activity to the core generating added value. This system provides the following quality features: mitigates the regulatory risks, reduces human opinion inconsistency, ensures the quality of the ratings, and allows efficiency in the rating process.
Data & Analytics are at the heart of our activity to create financial and non-financial insights and standardized qualitative assessments: automation of the rating generation process, generating instant control and supervision, incipient ML Technology in Refocal™ leading to human drafted automation. Credit Rating for medium-sized enterprises, with specific methodologies and processes that democratize access to this services, both in terms of price (10 to 100 times lower) and time (10 days)

Results

So far, Inbonis has rated more than 400 SMEs in Spain and France, with annual revenues between 5 and 500 million euros. In the last 12 months, Inbonis has rated 240 companies, with more than 50% of them accessing financing following the rating.
Inbonis has helped in the conception and development of several financing programs backed by public funds that require a credit rating from an official ESMA-registered agency, such as the Recapitalisation Fund (800M €) or the FAIIP program (Industrial Productive Investment Support Fund, 6Bn €) in Spain or the Relance program (12Bn €) in France. These funds, targetting small and medium-sized companies, are seeking to improve their access to long-term financing with alternatives to traditional bank financing.
In Spain, the Recapitalisation Fund has provided financing to 80 companies and has saved 37,000 jobs; all companies have been rated by Inbonis; as of March 2022, the FAIIP program had approved 4 operations of companies rated by Inbonis, totaling 151 M€ that will create 700 jobs.
There are more than 200,000 medium-size companies in Europe that could benefit from credit rating to improve their access to finance.

Lessons Learnt

There are two major barriers to SME credit ratings:
1. Lack of market awareness of this concept and financial education by SMEs. Ratings are usually associated with large companies and large agencies, and are not a product medium companies can benefit from. This is coupled with a lack of awareness of the existence of alternative sources of finance to banks to which these companies can also apply.
2. Difficulty in accessing structured data. SMEs do not have the same obligations in terms of reporting financial and non-financial information. Technological solutions based on machine learning are key to overcoming this barrier and boosting the efficiency of the process. Thanks to Refocal™ we are able to manage growth efficiently, which allows us to keep the same quality standards as the volume of activity increases.
If looking at the broad credit rating industry, it has to be noted that the market is clearly dominated by the Big-3: Standard & Poor's, Moody's, and Fitch, and that trying to compete with them in the same terms has not proved to be an efficient strategy.

First, to issue credit ratings a company has to be registered with ESMA, which entails a lengthy process in which methodologies, processes, and internal governance policies are scrutinized. Although this is a difficult process, once a company is registered it can issue credit ratings in all European countries and has an advantage edge over non-registered companies that offer financial advisory.
On top of this, the regulatory environment can represent a boost to this instrument in those situations where a credit rating is mandatory. This can happen in public processes where solvency and long-term viability of companies that are going to receive public funds want to be ensured, to increase transparency and objectivity in such operations, as well as to increase efficiency and manage risks.