Purpose The purpose of this paper is to develop a credit‐scoring model as an aggregate valuation procedure that integrates various financial and non‐financial factors and thereby improves small to medium‐sized enterprises' (SMEs) knowledge about their default risk. Design/methodology/approach Using panel data from a representative sample of Portuguese SMEs operating in the food or beverage manufacturing sector, this paper develops a logit scoring model to estimate one‐year predictions of default. Findings The probability of non‐default in the next year is an increasing function of profitability, liquidity, coverage, and activity and a decreasing function of leverage. Smaller firms and those with just one bank relationship have a higher probability of default. The findings suggest that a main bank has incentives to engage in hold up by increasing margins that ex post are too high. Practical implications Because SMEs differ from large corporations in their credit risk (e.g., riskier, lower asset correlations), this study has implications for both banks and supervisory actors. Banks should consider qualitative variables when setting internal systems and procedures to manage credit risk. Supervisory institutions should claim mixed credit ratings to determine regulatory capital requirements. Originality/value This paper offers a new model, focused specifically on SMEs, and explores the role of financial and non‐financial factors in determining internal credit risks.
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