Small private companies often have a tough time convincing skeptical creditors that they can meet their obligations as predictably as their larger, publicly traded brethren can. If small businesses pass muster at all, the terms they get are usually less attractive than those given to big companies. But a new credit-assessment service from Standard & Poor's could help small companies gain stature in the market. Launched last February, the service can provide credit suppliers with an independent view of how a business looks financially -- and credit seekers with a persuasive new weapon.
The decision to offer debt ratings to private businesses, notes Michael Zelkind, S&P's director of the new product, was in response to recent demand from companies seeking to improve their position with creditors. "A good rating can help smaller businesses in negotiations with landlords and commercial bankers," he explains. In addition, it might help a company save money by enabling it to meet the regulations some states set for self-insurance of workers' compensation.
So, how does S&P determine the appropriate rating? Among other things, explains Zelkind, S&P studies a company's ability to cover principal and interest expenses during weak periods. Once the rating is completed (on a scale of AAA to D), private companies retain control over who has access to the information.
The service isn't cheap: S&P charges companies $25,000 for the initial assessment (which includes an 8-page report on the business, plus updates from in-house specialists on the industry). To keep the rating current, companies must pay an annual fee of $15,000. -- Bruce G. Posner