Having a good business credit score is beneficial to your business in several ways. Banks and NBFCs assess the credit score of your organisation before sanctioning loans. The credit report is like a report card of the financial health of your business. It helps lenders evaluate your creditworthiness and decide whether to offer you credit or not.
Equifax®, CIBIL™, Experian, and HighMark™ are some of the popular credit bureaus in India that offer credit information reports and credit scores for businesses. To arrive at your credit score, credit bureaus consider several factors like the overall value of your debts, repayment of loans, length of credit history, etc.
The higher the numerical value of the score, the better is your capability of availing loans at competitive interest rates. Credit scores range from 300 to 900, and the recommended credit score range is 750 or above.
Whether you’re looking to expand your operations, invest in equipment or infrastructure, or improve the cash flow of your business, having a good credit score always helps. It not only improves your chances of loan eligibility, but also helps you enjoy reduced interest rates and better loan deals.
Now, that you understand the importance of maintaining a high credit score for your business, let’s take a look at some of the top ways to improve the score.
6 Steps to Maintain a Good Business Credit Score
#1: Pay your Business’ Bills on Time
Repaying your loan EMIs and credit card bills on time is a crucial factor in improving your personal credit score. The same is true with business credit scores. Late payments negatively impact your credit score, which in turn, is detrimental when applying for a business loan, line of credit, or business credit card.
One of the best ways to improve your credit score is to pay your dues on time. Defaults or late EMI payments, bounced cheques push your credit score down. Paying the business’ bills on time not only improves your scores, but also helps you maintain good relationships with vendors and other creditors.
#2: Aim for Lower Credit Balances
A good practice is to ensure that the credit utilisation ratio of your business does not exceed 30%. Let’s say that you have availed an OD of Rs. 10 lakh from your bank. Ideally, you should not use more than 30% (Rs. 3 lakhs) of the available credit. For instance, if you have withdrawn Rs. 3 lakhs from the available OD limit, it’s a good practice to repay the borrowed amount before you make any further withdrawals.
When your credit utilisation ratio goes above 30%, your credit score starts falling down. Even if you have to withdraw a larger amount, your credit score can bounce back if you repay the debt on time.
*Note that the 30% credit utilisation ratio is only a benchmark. Different credit bureaus have varying parameters. For example, Equifax® marks credit utilisation ratios up to 50% as green. When the credit utilisation ratio goes beyond 75%, your account is red-flagged and your credit score takes a drastic hit.
#3: Keep Business Debt Levels Low
Credit card balances, term loans and other credit lines are all liabilities on your credit report. The more loans you take, the more negative is the effect on your business credit score. Lenders generally do not sanction loans to businesses that have plenty of outstanding debt. To improve your credit score, try to repay older loans, as quickly as possible.
#4: Take a Short-Term Business Loan & Repay EMIs on Time
This may seem counterintuitive, but hear us out. Taking a short-term business loan and repaying it on time, demonstrates to the credit bureau that you’re capable of handling credit responsibly. This helps you boost an ailing credit score. However, make sure that you repay off older loans before implementing this tip.
#5: Do not Cancel Old Business Credit Cards
Your credit history plays a crucial role in determining your credit score. Having an old credit card/other credit account shows signs of stability and reflects the trust suppliers and vendors have on your business.
The older the credit account, the greater is its impact on your credit score. When you cancel an old credit card, it erases the associated credit history. Thus, this history cannot be included while calculating your credit score.
If you hold multiple credit cards for your business and want to cancel a couple, it’s always recommended to close the latest ones, so that the impact on your credit score is minimised.
#6: Check your Credit Report Periodically & Report Any Mistakes
If you are one among the thousands of business owners who do not track their companies’ credit scores regularly, you need to rectify this oversight. You can check your business credit score for free at CreditMantri. Provide a few basic business details and get your latest credit score and detailed credit report within a few minutes.
As a business owner, you should periodically monitor your business credit report. Look out for inaccuracies or errors. Even a small mistake in the credit report like an incorrect mobile number can impact the rating of your business. If you notice any mistakes/inaccuracies on your credit report, make sure to report it to the credit bureau and get it rectified as quickly as possible.
While reading your business credit report, make sure to watch out for these red flags:
High credit utilisation
Multiple credit accounts – credit cards, loans, line of credit, OD, etc.
Negative cash flows
If you notice any of these red flags, then you need to take the right remedial measures to improve the credit score of your business.
Finally, Keep your Personal Credit Score intact
Regardless of whether your business is new or well-established, most lenders also look at your personal credit score, before granting loans. Make sure to keep your business and personal finances separate, so that it’s easier to manage the cash flow of your company. Get a business credit card for paying for the daily expenses of your business and do not use it for your household/personal expenses.
Maintaining a good business and personal credit score improves your chances of securing business finance at the best rates.
Use the above tips to improve and maintain your business credit rating. Having a high credit score not only opens up new avenues of credit, but also helps you secure loans at more favourable terms. For any help on improving your business credit score, get in touch with CreditMantri, the credit score experts.