Every business, including small-scale enterprises, aims to grow and expand. However, access to the required working capital always could be a potential roadblock. While banks and financial institutions are the most accessible sources of funds, having a high business credit score, is one of the essential requirements to secure a loan.
In this article, we will attempt to answer some pertinent questions like what is business credit, will personal credit affect my business, besides highlighting the importance of credit score and credit history, among other noteworthy aspects about credit score.
Shriram Finance understands a credit score's importance for businesses and offers credit solutions like free credit information checks and business loans. Our suite of loans includes business loans, personal loans, commercial vehicle loans, used car loans, two-wheeler loans, car loans, etc. Additionally, we provide both fixed investment plan and fixed deposit plans. If you need a business loan, check the details and apply here.
What Is a Credit Score?
A business credit score reflects a business's creditworthiness and can range from 300 and 900. A credit score above 700 is generally considered to be good from both the borrower's and lender's perspective. Credit score importance for business is undeniable. A high business credit score enables businesses to avail of competitive business loans and higher loan amount at favourable interest rates while providing lenders with an assurance of lower default risk.
Factors Determining the Credit Score
Now that you understand what is a business credit score, let us explore the critical factors that contribute to building a credit score for a business
Payment History (30% weightage): Your payment history has the most significant impact on your business credit score. Make payments for outstanding credit card bills on time and loan EMIs (equated monthly instalments) to build and maintain a good business credit score. In contrast, instances of delayed payments or defaults can potentially lower it.
Credit Utilisation Ratio (25% weightage): This ratio refers to the percentage of available credit a business owner can utilise for their business. Experts recommend keeping credit utilisation below 30% of the total limit. Using a large proportion of available credit will reflect negatively on your credit score for business.
Credit Mix (25% weightage): The types of loans your business has availed of affect your business's credit score. A secured loan with shorter durations has a positive impact, while unsecured loans and longer-duration loans have negative implications.
Other Factors (20% weightage): Other factors like hard inquiries are made by your lenders when you attempt to access new credit and reflect on your credit report prepared by business credit bureaus. Multiple inquiries within a short period can negatively affect the credit score.
Benefits of Good Credit Score for Business
Credit score importance for business has several advantages, particularly when it comes to availing business loans
Quick Approvals: A high business credit score enables quick loan approvals, expediting the process for business expansion and growth.
Investor Faith: Business owners with a high credit score are likely to attract more investors. This reinforces investor confidence in the company and paves the way for fast-paced growth.
Better Interest Rates: With a good credit score, businesses can avail of loans at competitive interest rates. While a credit score of 700 makes one eligible, scores between 750 and 900 showcase a good credit history, making it easier to secure loans.
Ready Cash Flow: A healthy credit score ensures that you, as a business owner, can carry out expansion plans seamlessly without facing cash flow issues. Such companies find it easier to attract investors willing to provide financial backing.
Why Is a Credit Score so Important?
There is immense importance of credit scores for business owners seeking funds for growth and expansion
Loan Eligibility: A good business credit score makes you eligible for business loans. Lenders consider a high business credit score to indicate a borrower's ability to repay the loan amount on time.
Lower Interest Rates: Higher credit scores result in lower interest rates, reducing the overall cost of borrowing. This helps businesses save money and allocate resources more efficiently.
Trustworthiness: A good credit score reflects reliability and trustworthiness to lenders and investors alike. A positive credit history instils confidence in lenders about the borrower's ability to honour financial commitments.
Enhanced Financial Stability: Credit score's importance for business can be easily noticed when securing funding for the growth and expansion of your business. It provides stability by ensuring access to working capital and loans for other purposes when needed, thus avoiding disruptions in operations.
How to Improve Your Business Credit Score?
Maintaining a good business credit score requires strategic financial management
Timely Payments: You must pay your bills on time apart from loan repayments to improve your business credit score. Delays or defaults negatively impact the credit score.
Credit Utilisation Management: Keeping credit usage below 30% of the total limit is essential for a good credit score. Known as the credit utilisation ratio, it demonstrates responsible financial management and reduces the risk perception for lenders.
Diverse Credit Mix: Maintaining a mix of secured and unsecured loans can positively impact your business credit score. Timely repayment of various types of credit builds trust and demonstrates financial responsibility, thereby helping you maintain a good business credit score.
Regular Credit Monitoring: It is important to review your business credit report regularly to identify any errors or discrepancies that may be affecting your score. Rectifying these issues promptly ensures an accurate reflection of your creditworthiness.
Conclusion
Maintaining a good business credit score is crucial for seeking funds for the growth and expansion of your business. A high business credit score enables quick loan approvals, attracts more investors, offers better interest rates, and ensures smooth cash flow.
Improve your credit score for business by making timely payments, managing your credit utilisation ratio, maintaining a diverse credit mix, and regularly checking your credit report received from business credit bureaus.
At Shriram Finance, we understand the importance of a good credit score in securing funding for your business's success. We offer a range of credit solutions, including free credit checks, credit report downloads, business loans, auto loans, gold loans, and personal loans tailored to your specific needs. If you need a personal loan, apply here.
Key Highlights
- A high business credit score enables quick loan approvals and attracts investors.
- Availing loans at competitive interest rates is possible with a good business credit score.
- Maintaining a good credit score ensures seamless cash flow for business expansion.
- You must regularly monitor your business credit report and seek professional advice when needed.
FAQs
1. Why is a business credit score important?
A good business credit score is important for several reasons. It enables quick loan approvals and attracts investors, facilitating fast-paced growth for your business. A high business credit score also allows you to avail loans at competitive interest rates, ensuring seamless cash flow for business expansion.
2. How is a business credit score calculated?
A business credit score is determined by various factors such as payment history, credit utilisation ratio, length of credit history, types of credit used, recent credit inquiries, and unfavourable public records. These factors are weighed differently and contribute to the overall credit score.
3. How can I improve my business credit score?
To improve your business credit score, maintain a good payment history by paying bills on time and in full. Keep outstanding balances low and strive to reduce your credit utilisation ratio. Use a mix of secured and unsecured loans to showcase responsible borrowing behaviour. Regularly check your business credit report for errors or discrepancies and dispute any inaccuracies promptly.
4. How can I check my business credit score?
You can check your business credit score by accessing your business credit report from major business credit bureaus like CRIF High Mark. Reviewing your report regularly will help you track your progress and identify areas for improvement.
5. Is personal credit score linked to the business?
If you ask, can personal credit affect my business? The answer is yes; Personal credit can affect your business's ability to secure financing. Lenders often consider the personal credit scores of small business owners while evaluating their loan applications. A good personal credit score demonstrates responsible financial behaviour and increases the chances of getting loan approval.
