A business loan can be significantly beneficial for enterprises of all sizes — from startups to established companies. However, for the lender, offering money to a borrower always carries some level of risk. To offset this risk and compensate them for the benefit of instalment-based repayments, lenders levy an interest on the amount borrowed.
The rate of this interest is determined by various factors, among which is the credit score of a business. If you are a self-employed professional or an entrepreneur running a business, it’s important to know how to improve your credit score, so you can get the best available loan offer. In this article, we will discuss the reasons your score may be low and delve into how you can boost your credit score.
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What is a Credit Score?
A credit score is a metric that lenders use to assess how creditworthy a borrower is. In India, several credit reporting and rating agencies like Equifax, Crisil and CIBIL evaluate individuals and assign a credit score to them, based on their financial status, repayment history, existing debts and other factors. Similarly, commercial ventures in India also have credit scores that help lenders understand the business credit profiles.
The credit score indicates how likely a company or business is to repay the loan it borrows. A higher credit score or CIBIL score is typically more favourable than a lower score. The lender looks into the credit history of a business and checks this number before determining the eligibility, interest rates and terms of the loan. If your business has a strong credit score and if your credit history shows that you are a reliable borrower, it may be easier for you to obtain a loan offer with favourable terms.
Why is the Credit Score Important for a Business Loan?
Before you discover the different ways to improve your credit score, it is essential to understand why this metric is important for businesses seeking external financing. Here are the key reasons the credit score is crucial.
- It Determines Your Eligibility for a Business Loan
A strong credit score indicates that your business is financially reliable. This increases your chances of obtaining a loan approval. Lenders assess this score and check your credit history to decide if you can handle debt in a responsible manner. If your business has a low credit score, the lender may reject your loan application or offer stricter lending terms. This could make it harder for you to secure the funding you need.
- It Affects the Business Loan Interest Rates
Your credit score is also a crucial factor in determining the rate of interest on the business loan. A healthy credit score tells lenders that your business carries a lower level of risk than ventures with poor credit ratings. This often results in better terms and lower interest rates. Conversely, if you have a low score, your borrowing costs may be higher. This could affect your cash flows and profitability negatively.
- It Impacts the Amount You Can Borrow
Lenders also use your credit score along with other factors like your revenue and profitability to determine how much money they are willing to lend you. If your business credit score is high, it could increase your borrowing capacity and allow your business to obtain larger loans. However, if the score is low, lenders may limit the amount you can borrow.
- It Defines the Terms of Repayment
The business credit score reflects the creditworthiness of your venture. This, in turn, affects the terms and conditions associated with your loan repayment. Businesses with higher credit scores may have permission to choose longer repayment durations and receive better terms. This could reduce the monthly financial strain.
- It Makes Your Business More Credible
A good credit score also improves the reputation your business has among lenders, suppliers and investors. It reflects on your financial discipline and allows stakeholders to see that your business is reliable. This makes it easier to build better relationships with such parties. Your business can negotiate better terms and attract potential investors too.
How to Find Your Business Credit Score?
To take the steps to improve your credit score, you need to first be aware of your business’s credit rating. If you do not know what your business’s credit or CIBIL score is, here are some ways in which you can identify this crucial piece of information.
- Check with Credit Bureaus
Agencies like CIBIL, Experian, Equifax and CRIF High Mark provide business credit scores in India. You can visit the websites of these credit rating agencies and submit your business details (like PAN, GSTIN or other registration numbers). Once you do this, you can get your credit report from these bureaus and check your credit score.
- Use Your Bank’s Credit Services
Some banking platforms also offer credit assessment and monitoring services for businesses. So, if your business has an existing relationship with a bank, you can place a request to check or know your credit score online. Alternatively, you may also be able to access this service by getting in touch with your business’s relationship manager.
- Leverage Online Credit Monitoring Platforms
Many fintech platforms and financial advisory service providers offer the option to check your credit score online. Such platforms typically collaborate with credit bureaus to offer businesses instant access to their credit scores and credit reports. If you need to restore your credit score, such platforms may also provide personalised financial advice to help you with this.
- Review Your Business Credit Report
You can also find your credit score on your credit report. Even if you already have your credit score, it is crucial to monitor your credit report periodically. This is because errors in your report may impact your credit score negatively. So, it is always advisable to request a detailed credit report from these agencies and check for inaccuracies, if any.
Reasons for a Low Credit Score
If you find that your credit score is low, it is advisable to not panic right away. A low credit score may be traced back to any one of several reasons, which include the following:
- Delayed or Missed Loan Repayments
Late or missed loan repayments are among the biggest factors affecting your business credit score. Lenders report the payment history of all businesses to various credit bureaus. So, any repeated delays in repaying a loan are considered to be signs of financial instability. Even a single missed payment can lower your credit score. To avoid this issue and ensure timely payments, you can set up automatic payments or reminders.
- High Credit Utilisation
Depending on your financial records, your business may have an available credit limit. If you use a large portion of your available credit limit, it can affect your credit score negatively. Typically, a high credit utilisation (of more than 30%) may be considered a sign that you are heavily reliant on credit. This could make lenders view your business as a risky proposal. To counter this issue, you can reduce your outstanding balances and maintain a lower utilisation ratio.
- Frequent Credit Applications
If you apply for multiple loans or credit facilities within a short period, it may raise red flags for lenders tracking your credit score. Each time you make an application, a hard inquiry is initiated on your credit report. This may temporarily lower the credit rating of your business. If lenders see multiple credit checks and inquiries, they may assume that your business is struggling financially. This makes any approvals for new business loans more difficult.
- Defaulting on Loans
Any default on your business loan can also significantly impact your business credit score adversely. Defaults remain on your credit report for years. So, since lenders consider defaulting businesses as high-risk borrowers, it may become challenging to secure financing in the future. Your business loan applications may be rejected, or you may be offered loans with stricter or more unfavourable terms and conditions.
- Errors in Your Credit Report
Incorrect information in your credit report can also bring your credit score down. Any inaccuracies, like wrong loan amounts, outdated account statuses or even fraudulent transactions may unfairly lower your business credit score. To work around this issue, you must regularly review your credit report and dispute any errors promptly. This can help you prevent any unnecessary drops in your credit rating.
How to Improve Your Credit Score if You Want a Business Loan?
Now that you know why your business credit score is important and what reasons may lead to a low score, you can better understand the many ways to improve your credit score. If you find that your rating is low, here are some steps to improve your credit score.
- Avoid Payment Delays on Your Loans
Your payment history is a major factor in determining your business credit score. So, always pay your loan EMIs and vendor invoices on time. Late or missed payments can significantly lower your credit score. You can also set up automatic payments or reminders to make sure you pay your EMIs within the due date. If cash flow is tight, prioritise high-interest debts first to prevent additional financial strain.
- Avoid Multiple Loan Applications Over a Short Period
Every loan or credit card application triggers a hard inquiry. This can temporarily affect your credit score negatively because applying for multiple loans at once is viewed as a sign of financial distress by lenders. A better alternative is to research the best loan options, apply selectively for offers that may be suitable for you, and space out your applications to minimise the negative impact on your credit score.
- Regulate Your Credit Utilisation Ratio
Using too much of your available credit can also hurt your score. So, another way to improve your credit score is to keep your credit utilisation below 30% by paying off outstanding balances or increasing your credit limit. This demonstrates that your business is financially stable and not overly reliant on borrowed funds. So, lenders may be more confident about approving future business loans.
- Monitor and Correct Errors in Your Credit Report
Inaccuracies in your credit report — like incorrect payment records, outdated account statuses, or fraudulent activities — can lower your score. If that happens, here’s how you can boost your credit score. Regularly check your business credit report with bureaus like CIBIL, Experian, and Equifax, and if you find any errors, raise a query immediately to ensure that your credit profile reflects your actual debt status.
- Aim to Increase Your Credit Limit
Placing a request to increase the credit limit on your business credit lines is an easy way to lower your credit utilisation ratio. This, in turn, affects your credit score positively. However, if you take these steps to improve your credit score, ensure that you don’t increase your spending after the limit is hiked. This is because maintaining low balances while having a higher limit shows responsible use of credit.
- Build a Strong Banking Relationship
Maintaining a healthy relationship with your banking partner is another way to improve your credit score indirectly. This is because it increases the chances of your business securing a loan with favourable terms. This means you can maintain a stable cash flow, avoid overdrafts, and maintain a good credit history. Banks often consider these factors in addition to your credit score when they evaluate loan applications.
- Diversify Your Credit Mix
Lenders prefer businesses with diverse credit exposure rather than ventures that rely solely on one type of borrowing. This is because a healthy mix of credit facilities — like term loans, credit cards, working capital loans and trade credit — shows that your business can handle different forms of credit responsibly. So, managing various credit lines effectively is another way to maintain a healthy credit score.
- Maintain a Positive Cash Flow
Lenders assess your business’s cash flow to determine your ability to repay loans. Ensuring a steady cash flow through better revenue management, expense control, and efficient invoicing practices can improve your financial standing. A strong cash flow supports your credit profile, making it easier to secure a business loan.
Conclusion
Improving your business credit score is crucial if you want to obtain a business loan easily. The measures outlined in this article can help you boost your credit score and maintain a good credit history. That said, it is not a one-time effort. You need to adopt these measures and make them a part of your financial strategy if you wish to ensure that your credit score remains high enough to make borrowing easy.
