A Quick Look at the Relation between Business Loans and Credit Score
Business loans offer an easier access to funds to meet urgent business requirements without the businesses having to resort to losing their equity ownership. However, to minimize the risk of default by the borrower business lenders need to fulfil certain eligibility criteria with the primary requirement being a good credit score. Businesses with good credit scores are almost halfway through their approval process.
Whether a company needs funds for growing a business, handling day to day business, launching new products or conducting research and development activities on them, exploring new markets or anything else, a good credit score could help the businesses to avail funds faster. Not only the credit rating of the applicant business, but the lenders also evaluate the credit score of the primary applicant to ascertain the borrower’s reliability. While a high business credit score implies a reliable borrower helping the borrower to secure debt at lower interest rate and beneficial terms while a lower business credit score will mean just the opposite for the business or individual borrowers.
Understanding Credit Score for a Business Entity
A business credit score or commercial credit score is a quantifiable depiction of the creditworthiness of the business representing its capacity to repay debts determining its risk of granting credit. Such credit score is utilized by lenders and creditors on the basis of factors such as Credit score, age, size, and legal issues, etc. to make a decision whether or not to lend funds to the business impacting loan availability, interest rates, and business operations. In today’s evolving business environment, credit score for your business will not only be an essential factor to avail debt but also to attract investors and evaluate overall business health.
Typically, a business credit score between 300 and 900 with a credit score above 700 is generally considered to be good from both the borrower’s and lender’s perspective. High credit score facilitates businesses to avail higher sum loans with favourable terms with assurance of low default risk for the lenders. Whereas players with low business credit scores will obstruct their ability to avail loans from lenders. Read on to understand how to improve your credit score.
Steps to Improve Business Credit Score
Factors Determining a High Business Credit Score
Here are some of the critical factors which impact the business credit score in turn impacting the market influence that a business can make with the stakeholders, competitors and lenders. Learn and bring them to practice to improve your business credit score.
Business Age-
The number of years your business has been in existence has a significant influence on the business score. A lower credit business score indicates poor financial health or insignificant credit history for newly established businesses. However, with time as the business builds credibility for loan repayment it can increase its creditworthiness. Therefore a new business mostly faces problems in getting a loan sanctioned, and also has to undergo a lot of scrutiny from the banks and lenders which may involve a lot of paperwork, site visits, collaterals and even guarantors. Over time, with sound financials and timely repayment schedules the startup will be able to improve its business credit score. SME’s and new businesses may find it difficult and time consuming. Therefore it is advisable to outsource the work to an expert in banking like the BankKeeping.
Repayment History –
Repayment history for your business debt is a crucial factor to determine credit history for your business. Building and maintaining a high business credit score could be effectuated by making equated monthly payments on time. However, failing to make such interest payments on time or in case of loan defaults, might lower the credit score. Hence an efficient loan repayment mechanism goes a long way to improve the business credit score.
Credit Utilisation Ratio-
The credit utilisation ratio represents the proportion of available credit that an entrepreneur/ business could use to fund their enterprise. The credit utilisation of an enterprise should be kept lower than 30% of their entire borrowing limit. Where a business goes overboard this borrowing ceiling it is likely to lower its business credit score. Hence it is advisable to maintain a healthy credit utilisation ratio to improve business credit score over time..
Credit Mix –
Credit score of a business is impacted not only by the amount of loans but also the kind of loans availed by the business. For instance, long term loans or unsecured loans have a negative impact on the business credit score whereas secured short term loans impact the business credit score positively. Therefore manage loans effectively to improve business credit score.
Other Factors-
Lenders may also consider hard inquiries while applying for new credit and also appear on credit reports from commercial credit bureaus. Multiple inquiries made in a short period of time could negatively impact your business credit score.
Importance of good credit score for business
Maintaining a solid business credit score has far-reaching benefits including a plethora of business opportunities for business growth and financial advancement. Businesses with high credit scores are considered safe by the lenders which makes it simpler to access funds needed for supporting business growth. Apart from this, the following factors make having a high credit score important-
Fulfilling Loan Eligibility Criteria-
As pointed above, the greatest importance of having a good business credit score consistently allows easier access to capital. Lending institutions regard a good business credit score as a sign of the borrower’s capacity for timely debt repayments. It is simply a no hassle customer with good business credit score, the bank also needs lesser scrutiny and audit hence reducing its lending cost tremendously for such borrowers.
Loans Available at Cheaper Rates of Interest-
Businesses with high credit scores are able to get loans at cheaper rates of interest compared to other applicants due to their low risk of default and allows cost saving on borrowings for the business. Borrowers are more reliable and banks more eager to service such borrowers, hence they are in a position to negotiate better terms too.
Fosters Mutual Trust and Collaboration –
A strong business credit score demonstrates credibility and trustworthiness to investors and lending institutions both. A good business credit score gives lenders assurance that the borrower will be able to fulfil their financial obligations.
Enhanced Financial Stability-
When acquiring funds for your company’s growth and expansion the relevance of business credit score becomes obvious. By guaranteeing access to working capital money and loans for other uses, when necessary, it prevents operational disruptions and offers stability.
Faster Loan Approvals-
Having a high business credit score both improves your chances of getting approved and speeds up the process of loan approval and disbursal process for business borrowing requirements. It boosts the loan application by presenting a trustworthy picture of the applicant business in the eyes of the lenders.
Eligibility to avail Higher Loan Amounts-
Businesses may be seeking funds for aims such as leasing equipment, installing advanced software, payment of staff salaries, etc. might need immediate funds to resolve significant cash flow problems. You can negotiate a larger loan amount if your business has a strong business credit score which shows efficient debt management on your part.
Lower Tenure and Flexible Tenure-
Where a business has a good credit score businesses could obtain loans at favourable terms as lenders do not feel inclined to ramp up interest rates due to the risk of payment default.
Business Growth Opportunities
A good business credit score could assist the business to bring a partner or supplier onboard, negotiate flexible terms and conditions or winning lucrative new business. Low business credit score limits borrowing options preventing them to explore new business opportunities. Further, low business credit score may increase financing costs leaving lesser monies for investment opportunities.
Enhanced Competitive Advantage-
With a high business credit score, you enhance your company’s credibility and reputation in the business community, resulting in numerous partnership opportunities.
All the above discussions make it pertinent to maintain a good business credit score, and that is exactly what you need for your business to grow and thrive on. But the major question that comes to mind is what can be done so that the business entity can improve its business credit score or even get a higher internal rating with the banks while it applies for a business loan. In the next section we will delve into this further, while you may read about Bank’s Internal Rating system on our blog to know more about how banks have their own methods of rating borrowers before making a loan offer or working on the terms attached to the loan.
Key Strategies to Improve Business Credit Score
Unlike personal credit scores, the creditworthiness of a business could be extremely detrimental for its financial health and future growth. Here are some of the key strategies to ensure high credit score for your business-
Ensure Timely Payments to Improve Business Credit Score
Lenders consider credit repayment history to assess the eligibility criterion for offering business loans. Thus, it is indispensable for businesses to clear payments to suppliers and make loan repayments within the due period as missed or delayed payments could lead to fall in business credit score. In order to maintain repayments timely you could consider setting payment reminders or set up automatic payment mechanisms. You may also avail the services of BankKeeping in maintaining your banking compliance calendar to help you achieve deadlines better.
Maintain Lower Credit Utilization Ratio to Improve Business Credit Score
Always ensure that your business doesn’t exceed more than 30 percent of your total borrowing limit as it could signal overreliance on debt for growth or management of business operations. Therefore, where the total credit limit for a particular business is up to Rs.10L, make it a point to not to borrow more than Rs. 3Lakhs.
Ensure Efficient Debt Management to Improve Business Credit Score
Every business entity shall strive to ensure that all the pre-existing debts have been properly managed and paid off on time. Along with this, lending institutions prefer to collaborate with businesses with a debt equity ratio of less than one. Thus, businesses who take out multiple loans without paying them back means reduction in credit score which will ultimately give a sense of financial instability to the lenders.
Maintain Long-term Standing Accounts to Improve Business Credit Score
Lending institutions prefer to work with business clients with whom they share a long history as it allows them to get a fuller picture of the borrower’s debt repayment ability. Even in cases where the accounts are used infrequently, keeping it active could help businesses to improve business credit score. Again, extensive credit scores could provide lenders with a comprehensive understanding of their repayment history, business stability, their trustworthiness, and long-term financial conduct.
Seek Trade References to Improve Business Credit Score
Businesses could also seek trade references with vendors and suppliers on the basis of past transactions to show reliability and dependability as reporting trade references could impact business credit score positively. Good trade references demonstrate a business’s consistency in regard to receivables and a safer investment choice for the lender. Thus, holding certain trade references could serve as supporting documentation to increase eligibility.
Build a Sound Credit History to Improve Business Credit Score
Businesses who are relatively new should consider building a credit history for raising their credit score. For instance, getting smaller working loans or business credit cards whose payments are made timely could be beneficial to raise credit score. Other than making timely payments, newly established businesses should make smart borrowing decisions.
Periodically Review Credit Report to Improve Business Credit Score
Make a periodical review of the company’s CRR as well as its business credit score regularly. It will help businesses to gain regular insights into factors influencing their credit score and the extent to which it is impacted. As a result, businesses could take remedial steps to guarantee that there is no additional dip in their business credit score.
Build Diverse Credit Mix to Improve Business Credit Score
Businesses could demonstrate their ability to handle and utilize a variety of credit by having a varied credit mix of business credit card, revolving line of credit, and other loans. It could help to present a balanced financial profile leading to improvement in business credit score and attract lenders to collaborate with your business.
Foster Positive Supplier Relationships to Improve Business Credit Score
Developing long lasting connections with suppliers who report payment histories with credit reporting agencies might be another way to increase business credit score. Wherever feasible, put together favourable payment terms and make sure vendors are paid on time. Hence, positive supplier reviews could fetch a strong business credit score for the business.
Communicate Financial Challenges to Improve Business Credit Score
It may be possible for businesses to occasionally experience short term financial issues which affect its ability to fulfil their financial commitments. In such situations, businesses should strive for prompt communication with their creditors which will help them to minimize their adverse business credit scores while negotiating payment plans and guaranteeing transparent business relationships.
While making timely payments might progressively improve your business credit score, it is necessary to look for new creditors or lenders who are prepared to work with businesses in difficult situations. Further, businesses with low credit scores should consider adding co-signers or collateral to make up for high risk of default.
Opt for Longer Loan Tenures to Improve Business Credit Score
It could be helpful for businesses to opt for longer repayment schedules as it will simplify repayment commitments on time and lessen their monthly payments pressure. This helps to maintain a strong credit history even when it means payment of higher interest over the course of loan. People could increase their creditworthiness and gain access to capital by successfully achieving and maintaining high CIBIL scores.
Avoid Being a Guarantor to Improve Business Credit Score
It could be riskier for businesses to act as a Guarantor as your business credit score could be affected in case of default by the primary borrower. It is best to accept such arrangements if as a guarantor is confident in the ability of the borrower to repay funds and their financial stability.
Seeking Professional Assistance to Improve Business Credit Score
When your business has been struggling financially it would be a good idea to seek professional help as financial experts could offer valuable tips to navigate tough situations such as managing debt, disputing false claims and fostering good credit practices. Furthermore, they could also offer customized strategies to improve creditworthiness of your business which will impact the business credit score significantly. Collaboration with experienced professionals could help not only to build a better credit score but will also enable access to better financing options and business opportunities.
Managing everything on its own may be a tough task for the businesses, especially the SMEs.They may not have the bandwidth to handle all banking related negotiations, report preparations and even staff to be able to negotiate better with the banks even after having a sound and favorable position in terms of business stability. This is where you may need the help of experts like BankKeeping who will help your business at each stage of attaining a business loan, reducing interest or even negotiating the terms that may have any restrictive covenants thereof. The loan needs to be serviced and all necessary paperwork can be handled by experts so that there is no delay in submissions and no penalties levied by the banks. The experts can also ensure that the lenders or banks cannot charge extra interest than necessary or agreed upon.
How Long Does It Take to Improve Business Credit Score?
The process of building a business credit score or improving it for your business is a continuing one and may take anywhere from months to years. While it may take around three to six months to build an initial score, it may take up to one to two years to build a strong business credit score. The repayment rate could be affected by factors such as timely payments, minimal credit use, and multiple trade lines reporting to commercial credit bureaus. Although it may take longer than ever to minimize serious adverse remarks such as payment defaults or bankruptcy, continuous efforts and good credit practices could turn it into a high business credit score over a certain period.
Conclusion
Sustaining a high business credit score is essential for building trust and reputation in the business community as well as obtaining funding and favourable terms for payment. Strong commercial relationships could be formed and maintained when a commercial entity has a high business credit score which indicates its positive financial health. This in turn indicates a healthy relation with stake holders, better people management and sound business management abilities of the business entity. Financial adaptability is necessary for cash flow management, business expansion and taking advantage of growth opportunities.
It is critical to implement good financial practices such as efficient debt management practices, timely debt repayments, and refraining from overextending credit to increase high business credit score. Thus, take charge of your company’s credit score by closely monitoring credit score and making proactive financial decisions for improving the overall goodwill and business credit score of the company. To know more and get expert guidance on all your business loan related concerns, get in touch with experts like BankKeeping where you can outsource your banking business and let the experts handle your banking needs, through their efficient and latest software and proactive staff.