Whether you’re a new business owner looking to kickstart your operations or a well-established small or medium enterprise wanting to expand your business, strong creditworthiness is imperative to avail credit from formal lenders to achieve your business goals.
There are two metrics to measure creditworthiness – the first is the personal credit score, while the second is the business credit rank.
Lenders assess these metrics before they approve a loan. They especially pay close attention to your business credit report and the business’ financial behaviour to gauge your creditworthiness. By keeping these healthy, an MSME promoteror owner can get quicker approvals, larger loans, and better interest rates.
Credit report by credit bureaus such as CIBIL is like a report card that indicates the financial health of a business and helps lending firms decide whether to extend credit to the enterprise or not.
To arrive at a credit score, credit bureaus consider several factors such as the overall amount of loans that the enterprise currently holds, repayment history of loans, the length of the borrower’s credit history among other factors.
An important factor is also the velocity of debt build up, i.e., the quantity of and duration in which recent loans have been availed. If too many loans or a few very large loans have been availed in a short period of time, it impacts the credit score adversely. The higher the value of your credit score, the better are your chances to avail loans at competitive interest rates.
For instance, the business credit rank ranges from CMR 1 – CMR 7 (for CIBIL TransUnion) and the recommended rank ranges from CMR 1 – CMR 3.
Here are five easy ways for MSME owners to improve their credit score.
1. Keep Outstanding Debt in Check
Credit card balances, term loans and other credit lines are all liabilities on one’s credit report. The more loans an MSME takes, the more negative is the effect on the company’s business credit score. Lenders are wary of sanctioning loans to businesses that have a lot of outstanding debt. To improve credit scores, try to repay older loans as quickly as possible.
By keeping business debt levels low, micro, small and medium enterprises (MSMEs) can also opt for short-term business loans as obtaining such a loan and repaying it on time demonstrates the borrower’s capability of handling credit responsibly to the Credit Bureau.
The key is in the details. The lender uses a magnifying glass to assess the repayment history of the borrower. Therefore, always remember to repay even the last rupee within the due date. Never miss a single repayment; even a single rupee by even a single day can impact your credit score and put a dent in your repayment journey.
2. Ensure Lower Credit Utilization
Credit utilization ratio or rate can be calculated by dividing the amount you currently owe by your credit limit, typically expressed as a percentage.
While the ideal credit utilization ratio may vary depending on the credit bureau, most credit bureaus recommend that the ratio does not exceed30%. What this means is that if the ratio is more than 30%, it could indicate to lenders that you are finding it difficult to manage your finances.
A business’ credit utilization ratio will typically increase or decrease depending on the business’ payments and purchases. Also, it’s a good practice to repay the borrowed amount before making any further withdrawals.
3. Long-term Credit History Means a Trustworthy Business Borrower
Credit history plays a crucial role in determining one’s credit score. If a business shows an existing credit account, and a track record of successful repayments, it demonstrates that the business is stable and is trusted by both suppliers and vendors. The older the business’ credit account, the greater is its impact on one’s credit score, especially if the business has a long-term clean credit history.
Another point to note is that applying for the same loan from multiple lenders could lower the credit score. Therefore, any borrower, even a repeat borrower, should restrict the number of lenders when they apply for loans. Ideally, you should apply at no more than two select lenders, where you are certain that your application will be accepted.
4. Monitor Your Credit Report Frequently
One of the most essential things that a business owner must do is to track the business’ credit scores regularly. This is to ensure that any mistake can be rectified as quickly as possible.
As a business owner, such monitoring actually helps in multiple ways:
- If there are factual inaccuracies such as in contact details, they can be rectified easily by reporting them to the relevant credit bureau.
- This could help to flag unusual or fraudulent transactions, misuse of your business-related information or identity theft, changes in credit score and thereby loan eligibility, loan defaults, bounced cheques etc.
- Constant monitoring will enable the business owner to take remedial measures in case the credit utilization is close to or higher than the limit.
5. Get Your Business Registered
Last, but not the least, before applying for a loan, ensure that you’ve registered your business as a separate entity under the Companies Act. Establishing your business as a separate entity with the required licenses and giving it an identity separate from the owner can further help you open business accounts or avail business credit cards, which will build your credit report.
