The world of financing offers ready funds to individuals and organisations alike to meet their various high-value expenditures. In that respect, banks and lending institutions follow certain parameters to ascertain an applicant’s eligibility in availing loans and other kinds of credit. This way, lenders know the credit risks involved and can gauge their ability to repay loans on time before approving loan applications. Among the different eligibility requirements, one of the most essential aspects is the applicant’s credit score, which gives an accurate record of their finances and credit handling capacity.
What Is a Business Credit Score?
A business credit score denotes a company’s credit profile that helps lenders evaluate the firm’s monetary fitness. Key credit bureaus in India such as TransUnion CIBIL, Equifax, Experian and CRIF Highmark generate the business credit score, just like your personal credit score, as part of the main Credit Information Report (CIR). They maintain a record of credit dealings pertaining to every organisation based on data provided by previous lenders.
Every time lenders receive loan applications from companies, they access this credit history to scrutinise the firm’s past loan repayments, timely credit payments, current debts, type of credit availed, duration of credit history, etc. On the basis of such information, credit bureaus accord a credit score to every business concern ranging between 300 and 900, which indicates the extent of their financial well-being.
Why Does a Business Credit Score Matter?
Lenders consider a company’s business credit score while processing their loan request. It enables them to assess the creditworthiness of the organisation and further decide whether or not to sanction the loan and if so, how much money they can lend and what should be the terms and conditions of the loan.
Why Is a Business Credit Score so Important?
Availing a loan is among the best ways to fund business needs - as working capital, for equipment purchase or expansion purposes. For securing loans, the importance of a business credit score can be highlighted in the following ways:
To Get Credit Approvals Easily
Lenders get a realistic overview of a company’s credibility through their business credit score. Hence for a business firm, borrowing funds necessitates an excellent credit score to facilitate hassle-free loan approvals.
To Secure Higher Loan Amounts
Company necessities such as sorting cash flow issues, leasing office space, purchasing production equipment and the likes can cost a lot of money. A high credit score indicates that you can manage finances well, thereby allowing you to negotiate bigger loan amounts to conveniently fulfil all your business needs.
To Obtain Attractive Interest Rates and Terms
Organisations with a favourable credit score can obtain loans at competitive interest rates. When extending loans to such firms, lender don’t need to cushion their rates as there is lesser lending risk involved. In addition, companies can select a repayment tenor that suits their financial standing. They may choose a longer tenor that lets them pay smaller EMIs each month without straining the budget. But if their earnings permit, they can pay off the loan earlier by opting for shorter tenors with a hefty EMI outgo.
How to Improve Your Business Credit Score
Every company should ideally maintain a good credit score all through. However, if your firm is found lacking, you must improve the CIBIL score to avail the ideal loans in future. This can be achieved through the methods mentioned below:
- Repay loans and other types of credit on time. Avoid delays or missed payments.
- Pay vendors in full within the agreed time frame.
- Watch your credit utilisation ratio. Restrict the credit available to you so as not to overstep the credit limit.
- Keep personal and business credit separate. Using business credit for company expenses builds your credit score.
- Check for errors on your business credit report that can negatively impact the credit score and get them corrected.
- Pay attention to your personal credit score. Lenders may review it along with the business credit score before sanctioning loans.
A good CIBIL score is a vital consideration for organisations if they wish to seek credit. As long as business houses handle their finances sensibly, repay loans regularly and clear pending dues on time, it should not be difficult to access all types of business financing. Even then, it is better to check the credit score from time to time so that firms can monitor their business credit score and take immediate remedial measures if needed.
Also Read: How Does Your CIBIL Score Affect Your Home Loan Application?
