As the Covid-19 pandemic continues across the country, at CreditMantri, we're doing our best to help our customers and readers during this unprecedented crisis. We have compiled several articles to help our customers keep their credit on solid footing during this ongoing global pandemic. In this article, we share tips on protecting your business credit score during Covid-19 and how to stay on top of business finances.
Impact of Covid-19 on Businesses
The Covid-19 pandemic has affected each and every individual across the world. Whether you had to deal with extended isolation due to lockdowns, loss of pay, or sudden job losses – the pandemic has made everyone think hard about their financial future. Businesses of all sizes and across industries are concerned about losing their steady income during this crisis. Some have even been forced to shut down or scale back their operations. To state that the Covid-19 pandemic has turned people's financial lives upside down is no exaggeration.
Right now, your business credit score may not be at the top of your priority list. When you're more concerned about making ends meet – maintaining a steady cash flow, paying EMIs on time, staff salaries, and not to forget Diwali bonuses/hikes for staff – it's no wonder that the business credit score takes a backseat.
But, ignoring your credit score, especially during a crisis can prove costly for your business. Let’s find out why.
Additional Reading: 6 Tips To Improve & Maintain Your Business Credit Score
The Intricate Link between Business Credit Scores & Financial Opportunities
As you work on paying bills on time and managing multiple payments, you should also focus on your business credit score. Even if you don't plan to take a loan shortly, it's a must to maintain good credit. Once the pandemic is over, and things settle down, you'll eventually start spending again. Industry experts predict that the market will bounce back. When it does, you need to have a good credit score to capitalise on the available opportunities.
So, how do you protect your business credit score during Covid-19? Remember that credit scores play a crucial role in determining the future financial opportunities of your business. Having a good credit score is essential to avail loans in the future. A healthy credit score determines your creditworthiness.
Irrespective of the type of loan you take, any lender – be it a traditional bank or new-age digital lender – checks your business's credit score before offering loans. The credit score helps lenders evaluate whether your business can repay the loan amount or not.
While India is currently in lockdown relaxations stages, the economy hasn't picked up pace yet. There are high chances that your business may require a loan to make ends meet or to capitalise on the available market opportunities. When you apply for a loan, the lender will first check your business credit score before sanctioning your loan.
Having a high credit score for your business is like having an ace up your sleeves.
It improves your loan eligibility chances and also helps you secure an attractive deal on the interest offered by the bank or NBFC. This article shares some tips and guidelines on how to manage and protect your business credit score during this global pandemic.
Let's dive in right away!
#1: Stay in the Loop – Check your Business Credit Score Regularly
To maintain your business credit score or improve it, the first step is to be aware of your latest business credit score. Unless you check your credit score regularly, you won't know whether it has improved or dropped down.
If this is your first time checking your business credit score, here are a few points to know. Several factors impact your business credit score. Some of the critical factors that determine your scores are:
- On-time payment history
- Number of years in business
- Outstanding debts/ongoing loans
- Credit score/credit activity of the owner
- The financial position of the business
The credit score usually ranges between 300 and 900. In India, Equifax, Experian, Crisil, TransUnion CIBIL, and CRIF High Mark are some of the authorised credit bureaus that provide credit scores to businesses. A score of 750 or above is considered good. You can check your business credit score for free on CreditMantri. Just enter a few details about your business, and you can get the latest score within a few minutes.
Now that you know where you stand, here are a few tips and guidelines to help you improve or maintain your scores.
#2: Watch out for Errors in your Credit Report
Once you get your business credit score and report, the next step is to check for any errors. If you notice any errors, make sure to report it to the credit bureau and get it rectified.
Besides the administrative errors, you also have to watch out for red flags. Red flags are actions that are pulling down your credit score. Some of the red flags that need to be rectified include:
- High credit utilisation
- Cheque bounces
- Too many ongoing credit accounts
- Negative cash flows
- Negative consumer feedback
#3: Maintain an On-Time Payment History
Whenever you approach a lender for a business loan, the lender determines the loan sanction, interest rate, and other terms and conditions based on your business credit score. When you have a high credit score, it reflects your creditworthiness – meaning lenders trust you to repay the loans on time. Hence, they are likely to grant your loan request and offer you better deals on loans.
Your repayment history plays a crucial role in determining your credit score. Maintaining an on-time payment history shows that you're responsible when it comes to debts, and you have the capability to repay debts on time. This boosts your credit score, which, in turn, improves loan eligibility and interest rates. Default in loan payments impact your credit score negatively.
So, try to repay all your debts – loan EMIs, credit card bills, and other bills – on time.
#4: Opt for Loan Restructuring, if Needed – But, Proceed with Caution
As the loan moratorium period ended on 30th September, India's government has allowed loan restructuring for eligible businesses. By opting for restructuring, you can reduce your monthly EMI or extend the tenure. However, restructuring has its downsides – it can increase your overall loan burden. Note that restructuring is only temporary relief and should be availed with caution.
Analyse the pros and cons of restructuring to decide if it's the right option for you. If you're unable to repay your loan EMIs on time, you can go for restructuring. Divert the funds to procure inventory or pay wages. Once your cash flow is back on track, repay your loans on time to boost your credit score.
#5: Lower your Credit Utilisation
One common mistake that business owners make during these difficult times is to withdraw a large amount of the available credit. This is a grave mistake and can negatively impact your business credit score.
For a healthy credit score, you should aim for a credit utilisation ratio of 30% or less. When you exceed this limit, your credit score starts to take a hit. So, keep a note of your credit utilisation and stay within the approved limit to avoid damaging your credit score.
#6: Do not take on New Loans, Unless Absolutely Necessary
The final piece of advice is that if you're looking to protect your business credit score, you should stay away from new loans during this period of crisis. Term loans, overdrafts, credit lines, and credit card balances – all indicate liability on your credit report. Taking on new loans during these challenging times can put your credit score in trouble.
Maintaining a good credit score is critical for the financial health of your business. Use the tips listed here to protect and boost your business credit score – both during and after the pandemic.