Avail a loan for your business easily with the help of a good commercial credit score

An important point to note is that in the case of small businesses, there is a strong correlation between the borrower’s personal credit and business credit behavior.

Many businesses approach banks & NBFCs for commercial credit when considering business sustenance and expansion. In simple terms, commercial credit is a sum of money granted by financial institutions to a business which can then access this sum as and when required to meet certain financial commitments. These can include day-to-day activities, purchase of inventory, machinery, property, and acquisitions. It is advisable to have a good commercial credit score to easily avail of commercial credit.

According to the RBI, a credit score ranges between 300-900, with 900 signifying the lowest risk profile. This score forecasts the likelihood of a default for a business seeking credit. A healthy commercial credit score helps a business negotiate for better lending terms. It also increases the probability of availing a loan and shortens the application to disbursement cycle, as it indicates better creditworthiness or the ability to repay the debt availed.

A commercial credit score is based on multiple parameters. Such as credit repayment behaviour, credit utilization ratio, credit mix, and other factors. 

The Commercial Credit Score considers the following credit behavioural characteristics. Hence, as a business, it is advisable to take timely actions that improve these characteristics (e.g., never miss repayments on existing loans).

  • Amount of past due installments: It shows the borrower’s past due payments that have not been made in time or made at the end of the due date. It also displays the borrowers’ past credit history, such as the amount of loans they have availed of, and if they have repaid their dues in full payment or a minimum amount.
  • Utilization of credit limits: By checking the borrower’s credit utilization limit, a lender can assess whether the business has crossed its credit limit. If a business uses a large portion of available credit, it can be a red flag for lenders and negatively impact its credit score.
  • Security: The lender has an overview of the asset/collateral provided by the borrower while availing the line of credit.
  • Presence of negative status: There are several types of statuses on a credit report, such as closed, settled, and written off. Settled indicates that the lender has agreed to accept a smaller payment than the whole sum the borrower owes. The lender records the debt as a “write-off” if the borrower doesn’t make any payments on the unpaid credit card balance or loan balance for more than 180 days. On the other hand, a negative status such as willful defaulter indicates that the borrower had no intention of repaying the debt even if they had the ability to repay it. Lenders closely evaluate a borrower’s creditworthiness, keeping these negative statuses in mind.
  • Length of credit history: A company’s credit history helps the lender assess the borrower basis their past repayments, accounts, and additional loans availed. It helps in providing a clear understanding of the borrower’s creditworthiness.

A commercial credit score enables lenders to make more informed decisions by assessing a business’s risk and credit health. A stronger score makes businesses more appealing to lenders and improves its credit standing, thereby easing commercial credit access for the businesses. Accessing the commercial credit score on a regular basis will help businesses navigate the credit lending landscape more efficiently.

An important point to note is that in the case of small businesses, there is a strong correlation between the borrower’s personal credit and business credit behavior. The most common example of such businesses is sole proprietorships. In such setups, the lender might want to evaluate the borrower based on their personal credit score in addition to their business credit score.

Subhrangshu Chattopadhyay, Director Business Development, CRIF High Mark

Source: Publication: Etedge ,27th June,2023