As a small
business owner in India, you probably know that keeping a sound credit
score is integral for securing a business
loan. This is because it tells the lender how trustworthy you are. A
high credit score indicates that you pose minimal risk to the lender. So,
getting a business loan approval would be a breeze, provided you meet
the other standard requirements of the lender – such as annual revenue and
overall business experience.
A low credit
score, on the other hand, will make it very difficult to get an unsecured
business loan, even if you meet or exceed the other requirements.
Exactly, what is a good credit score?
The credit score
scale ranges from 300-900. Anything above 750 puts you in good stead to secure
a small
business loan in India.
How can you check your credit score?
In India, there
are six primary credit bureaus to perform credit assessments. They are CRISIL,
CIBIL, ICRA, Equifax, CRIF High Mark, and Experian. You can log into any of
their websites and check your credit
score, before you apply for a small
business financing loan.
What can you do if your credit score is low?
A good credit
score is the first thing a lender looks for in your business
loan application. It is a measure of your ability to clear your debts on time, based on your past
transactions. A poor credit score or the lack of one severely dents your chances of seeing the stamp of
approval on your business
loan application form.
But it is not
the end of the road. Even if your present credit score does not cross the
threshold mark, there are ways you can rely on to improve and maintain it.
Let us look at 6
of the most important ways:
1. Keep Regular Tabs on Your Credit Score
Many people make
the cardinal mistake of checking their credit score right before they are in
need of easy
small business loans. This might not give them enough time to deal with
a negative remark on their credit score report. On the other hand, checking
your credit score periodically – once every 4 or 6 months – will give you ample
time to take the necessary steps to counter situations like these, much before
applying for a finance
for business.
Also, there is a
misconception that checking your credit score affects your rating. The reality
is when you check your credit score, it is considered a ‘soft inquiry’. Unlike
a ‘hard inquiry’, a soft inquiry does not affect your credit score and is not
visible to lenders.
2. Pay ALL Your Debits Timely (even the ones you consider small or
insignificant)
Your unpaid
debts – credit card bills, EMIs – can be a major roadblock to your application
for finance for a business.
Any payment defaults will drag your credit score down. Be it a cash crunch
scenario or a case of missing the due date, you will eventually lose out on getting
a small business loan.
So to avoid such
scenarios, ensure that you set reminders for all your monthly payments. You can
turn to technology such as mobile phone applications to assist you in this regard.
As far as cash crunch scenarios are concerned, effective budgeting beforehand
can help you stay out of it.
3. Avoid Simultaneous Loan Applications
Applying for small business financing
loansto multiple lenders in a short time span reflects poorly
on your credit score. In such cases, your credit score report will throw up
multiple “hard inquiries” – inquiries made by lenders, which will adversely
affect your credit score. To a prospective lender, you will come across as a
credit hungry person.
Multiple business
loan applications can also indicate that your debt burden may increase
in the future – a red flag for lenders.
4. Be Wary of Joint Loan
Applications
To increase the
chances of a business loan application being approved, many turn to
joint loan applications for business capital loans.
Although this method does improve your chances, what you may miss is a
possibility that your co-applicant makes a mistake leading to a default in
payment. This will affect your chances of getting small
business loans online.
5. Keep an Eye on Your Credit Card Utilisation
For all your
credit cards, you have to adhere to one simple rule – do not allow your card
utilization to breach 30% of the total credit card limit. This will keep your
credit scores stable. A high credit utilization limit can also indicate the
possibility of a looming debt burden. If your credit utilization is high, take
steps to lower it. Be financially disciplined and avoid using your credit card
for all your purchases. Excessive usage allows the lender to look at your
spending habits, something best kept to yourself.
A tip – Ask your credit card company to alert you if you are closing in on the utilization limit.
6. Take A Loan
At first glance,
this may seem counterproductive. But, it is actually a very effective way to
boost your credit score. This is especially handy if you don’t have a credit
score at all. Remember –having no credit history doesn’t qualify you as a good
candidate to receive a quick
business loan. This is because the lender will have no idea if you can
repay on time.
So, take an easy
business loan; an unsecured business loan is a better option if you
don’t want to risk mortgage. Pay your instalments on time, and if you can, try
to close the business loan early. This will help you build your credit
score.