Importance of Credit Score When Securing a Business Loan

Getting timely financing is crucial for the success of any business. This is particularly true for MSMEs who rely on a steady flow of income to clear payments on time. So, how do businesses secure loans from banks or financial institutions? One of the primary tools used by lending institutions today to determine a businesses’ creditworthiness is their credit score. 

So, what is a credit score, and how would an individual or business know if they have the right score to secure a loan? This blog will answer all of the questions about the importance of a good credit score and how businesses can secure a business loan with ease.   

What does the credit score indicate about a business?

A business credit score is a number that indicates whether a company is a good candidate to receive a loan or become a business customer. Business credit scores are determined by credit scoring companies using a range of criteria, such as credit history, age and size, and legal issues.

Similar to how individuals are given a CIBIL Score between 300 and 900, companies are given a CIBIL Rank between 1 and 10, with Rank 1 being the best with a high likelihood of receiving funds and Rank 10 being the worst with little chance of credit approval. 

Businesses get scored from the information provided by lending banks and financial institutions. Factors like a business’s history of payment, credit usage, and financial health, among others, are assessed while generating a credit score. 

The following are some major advantages of having a high business credit score:

1. Determines the creditworthiness of a business

Establishing your business creditworthiness is critical for obtaining funding and cash for your company as well as for further expansions. Your credit score plays a major part in this process. Moreover, the business’s credit score affects the amount of funding you have access to, the terms and conditions of your loan, and the interest rates.

2. Speed up the borrowing process

Having a good business credit score makes it easier and less stressful to obtain financing. It also increases the likelihood that your loan will be approved quickly. Furthermore, it strengthens your application and establishes the credibility of the business in the eyes of the lender.

3. Higher loan approvals

Depending on your company’s needs, you might need to have access to a significant amount of credit. Having a high credit score empowers you to negotiate a larger loan amount and serves as evidence that you are a responsible borrower.

4. For lower interest rates

If your business credit score is strong, lenders will be more willing to offer you competitive interest rates. You can bargain for reduced interest rates by establishing yourself as a low-risk borrower.

5. Flexible loan tenure

If your company’s credit score is high enough, you may be able to work out a longer loan term and a flexible repayment plan that’s compatible with your cash flow.

How can businesses improve their credit score?

While there isn’t one way to raise your company credit score, you can take measures to increase your business credit score.

1. Check your credit report periodically

Periodically review your credit report and report any errors. There are platforms/portals that offer a free company credit score check. By providing a few simple company facts, you can receive your most recent credit score and comprehensive credit report in just a few minutes. 

Watch out for mistakes or inaccuracies. Your business’ rating may be impacted by even a little error, such as an incorrect mobile number. Make sure to report any errors or inconsistencies to the credit agency and have them corrected as soon as you see them on your credit report.

Take note of the following indications when you review your company credit report: 

• High credit utilisation 
• Many credit accounts, including loans, credit cards, lines of credit, OD, etc. 
• Bounced cheques 
• Defaults on loans 
• Negative cash flows 
• If you see any of these warning signs, you must act appropriately to raise your company’s credit score. 

2. Pay your bills on time

One of the simplest ways to raise your credit score is to make rent and utility payments on time to suppliers, lenders, and utility companies. You may have to shuffle your cash flow to beat the due dates, but getting ahead of your payments—even by one or two days—can raise your credit score.

To guarantee that you pay on time, consider the following advice:

• Organize your payables using a spreadsheet.
• For ongoing expenses like monthly debt repayment and utility bills, set up automated online payments.
• As soon as you receive an invoice, file it and make a note in your calendar to pay it on time.

3. Keep your credit usage ratio low

Your credit utilization ratio is the amount of credit utilized for a billing cycle. Credit reporting companies generally value lower credit usage ratios because they indicate that you are not using all of your available credit.

A good credit utilisation ratio is 30%, but an excellent ratio is around 10%. Assume you possess a business line of credit worth ₹200,000. In order to attain a 30% credit use ratio, you should spend a maximum of ₹60,000 during one payment cycle before paying off the entire amount.

What to do to reduce your credit utilisation ratio:

• Reduce your balances to a minimum. Paying off your bills on a regular basis decreases your credit usage ratio.
• Make small purchases throughout the month. To ensure your debt doesn’t grow too large, try making several small payments rather than just one large one.
• Raise the limit on your credit. Call your credit card company or credit issuer to ask for a higher limit. Your credit utilisation ratio falls when you raise your limit without also raising your balance.

4. Keep Your Old Business Credit Cards Active

Your credit history largely influences your credit score. A stable credit card or other loan accounts demonstrate consistency and indicate to vendors’ and suppliers’ confidence in your business. 

The older the credit account, the higher its impact on your credit score. When you cancel an old credit card, it erases your related credit history. Therefore, this history cannot be taken into account when determining your credit score. 

If you wish to eliminate a few of your business credit cards, you are advised to close the most recent ones to minimise the negative impact on your credit score.

Conclusion

Now that you know how to increase your business credit score, use the above tips to improve and maintain your business credit rating. In addition to providing access to new credit options, a good credit score also makes it easier for you to secure loans on more favourable terms.

You can also check your credit scores with TallyCapital for free. Some of the features of TallyCapital’s lending solutions are paperless documentation, instant approval, personalised advice, and hassle-free business loans. Tally ensures that your business gets the support it needs—fast and effectively. It does this by making the loan amount customizable, making procedures easy, and requiring no collateral.