Ways A Small Business Can Improve Its Business Credit Score
If you are a small business owner in India, regardless of the type of business you own, it is essential that you have a solid understanding of business credit scores. It is one of the critical factors for getting finances, leveraging growth opportunities and safeguarding your business during uncertain economic times. In this guide, we discuss the key aspects of business credit scores and provide tips on how to improve them.
What is a business credit score
In simple terms, a business credit score reflects your business’s financial health, stability, and creditworthiness. All financial organisations, including banks, NBFCs (non-banking financial companies), and credit card companies, will typically conduct a thorough business credit check before extending a loan or offering a credit card.
There are several credit bureaus in India that compute business credit scores, and each of them may use different parameters or methods to calculate the score. Therefore, your business credit score may vary in different bureaus’ credit reports.
CRIF assigns a business credit rank ranging from 300 to 900, making it the only Credit Information Company (CIC) that provides a numerical score for business entities. Additionally, CRIF offers a commercial rank from CIBR 1 (highest creditworthiness) to CIBR 13 (lowest).
The higher the business credit rank or the commercial rank, the higher the creditworthiness of your business.
Importance of maintaining a good credit score for business
Now that you know what is a business credit score, you must understand the importance of maintaining a good credit score and keeping a strong business credit history.
Your business credit score can impact every aspect of your business operations, as it determines the interest rate on business loans. Companies and stakeholders typically review credit reports to inform business decisions and determine pricing and payment terms accordingly. Financial institutions are more likely to offer business loans to companies with strong credit scores, typically on more favourable terms and with lower interest rates.
In contrast, a strong business credit score can help maintain a good cash flow and facilitate access to funding from lending institutions, often with better repayment terms. All of these can help you expand your business operations and profitability.
How to improve business credit score?
If your business credit score has not dropped or if you have not been able to improve the score, the following tips for how to improve business credit score can surely be helpful and set your business up for achieving great success.
• Making all your payments on
If you have availed a loan for your business, make sure that you repay the amount on time and in full. This is considered responsible financial behaviour, and it also demonstrates your business’ good financial standing and stability.
• Avoid taking too many credits at the same time
As a small business owner, it can be quite tempting to apply for a business loan every time you see an opportunity to expand your business operation. However, please note that each time you apply for new credit, it will trigger a hard credit inquiry, which may temporarily lower your credit score.
Additionally, holding excessive debt simultaneously can have a substantial impact on your business's finances and cash flow. Additionally, if you are seriously considering a business loan, you can first verify the business loan eligibility requirements of various lenders and select the most suitable lender accordingly. This approach will help you avoid submitting unnecessary applications, which may potentially damage your business credit.
• Review your business credit report periodically
When you talk about tips on how to build your business credit and improve your business credit score, one of the easiest and most effective ways is to review your business credit report at regular intervals.
As you review your credit report, ensure that you check for any errors or incorrect information, such as outstanding dues that may have already been paid. Being proactive in monitoring your credit report can help you identify and report errors, as well as address the cause of any dip in your credit score.
Maintain a Healthy Mix of Credit Types
Lenders prefer to see that your business can handle different types of credit such as term loans, credit cards and working capital lines responsibly. A balanced credit mix shows financial maturity and can contribute positively to your credit score over time.
Accelerate Credit
If your business has a stable cash flow, consider making more than the minimum payment or repaying loans ahead of schedule. This not only reduces interest costs but can also reflect positively in your credit history, helping to accelerate your score improvement.
Once the issue is fixed, your business credit rank will automatically improve.
Conclusion
Improving a business credit score is not as challenging as you might think. It only requires you to be responsible with your finances, repay your dues on time, and monitor your credit report regularly, among other things. Utilise the above tips to enhance your credit score, and you will be in a better position to steer your business in the right direction for long-term success.
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