Ways You Can Improve Your Credit Score for a Small Business

A business credit score is a numerical representation of its creditworthiness and repayment capacity and a small business credit report is a detailed electronic summary of a business’ credit history. The credit score for small businesses is calculated by third-party credit rating agencies or credit information bureaus. Unlike personal credit scores that range between 300 and 900, small businesses’ credit rating varies between 0 and 100. Lenders consider 75 to be a good credit score for small businesses.

In the world of small businesses, it is crucial to have quick access to credit and lenders decide whether to extend credit to a specific small business based on their credit rating. Over the years, several surveys have been done to understand the impact of small business CIBIL reports and CIBIL scores on lenders’ decisions to lend money to these businesses. A 2017 survey reported that 25% of small businesses apply for credit and get rejected and the most common reason for rejection is an inadequate CIBIL score. Another survey revealed that almost 50% of small businesses use personal credit cards to take care of business expenses. This complicates not just one’s personal CIBIL score but also meddles with one’s ability to get access to business funds.

A small business credit report does not only determine whether the company will get credit but also determines the amount of credit the company will get as well as the terms and conditions of the loan. Not many people know this but a small business credit report also determines how easy it will be for them to get insurance as well as the insurance premiums they must pay. Further, most commercial landlords, these days, decide whether to rent their commercial premises to a business after checking the business' credit score.

In conclusion, a small business’ CIBIL score is crucial as it affects many important things. The question is how to improve CIBIL score. Well, the process of improving a business’ CIBIL score is the same as the process of improving one’s personal CIBIL score. In this article, we share with our readers some simple tips on how to improve CIBIL score. So, read on.

How to Increase CIBIL Score? 

The following are some ways you can increase your CIBIL score: 

Always Pay Your Company’s Bills on Time

As in the case of an individual’s CIBIL score, a business credit score is also directly impacted by the business’ repayment history. In fact, the repayment history is the most crucial factor that affects the credit score of a small business. Therefore, if you want to increase CIBIL score, make it a point to clear all credit card bills and EMIs – set up reminders for due dates so that you don’t miss paying your bills on time. Further, do not let your cheques get bounced as this too affects a small business’ credit score negatively. Small businesses must clear all bills on time as this not only helps them build a good credit score but also allows them to build good relations with lenders and vendors.

Keep the Credit Utilization Ratio on Your Business Cards Under 30%

The credit utilization ratio is the ratio of credit used to credit available. A high credit utilization ratio is not considered good by lenders as it is the sign of spendthrift borrowers. Borrowers must try their best to maintain their business’ credit utilization ratio under 30%. Most small businesses also do not know that when they keep paying only the minimum due on their credit cards, their credit utilization ratio automatically decreases. Therefore, those small businesses that want to increase credit score must keep their credit utilization ratio under 30% and try to clear the entire amount due and not just the minimum amount due each month. 

Take a Small Business Loan and Clear EMIs on Time

If you have a new credit history, you can benefit from taking a small, short-tenor loan and paying it on time. Doing so will convince your lender of your ability to repay loans on time and this will not only help you build a strong credit history but also convince lenders to give you loans on better terms and conditions. 

Apply for Loans Only When Absolutely Necessary

Whenever a small business applies for a loan, the lender with whom they have made an application for the loan sends an enquiry to one of the credit information agencies to enquire about the small business' credit rating. Each such enquiry gets registered as a hard enquiry. Too many hard enquiries show businesses to be credit hungry and ruin their credit score. How to improve CIBIL score of your small business? Apply for credit only when you absolutely need it.

Also Read: Know All About the Ideal CIBIL Score for Business Loan

Do Not Close Old Loan Accounts

One of the factors that affects a business's credit score is the length of its credit history. The older a business’ credit history, the higher its credit score. Many small businesses take loans and then once they have repaid the loan, they close the loan account simply because they think it is difficult to keep track of so many different loan accounts. However, if you want to increase CIBIL score, you must never do this. When you close an old business loan account, your entire credit history gets deleted, which in turn, impacts your business score negatively.

Check Your Credit Report for Errors from Time to Time

Credit information bureaus or credit rating agencies decide a small business’ credit score based on the information provided by the lenders and the financial institutions that the company has worked with in the past. Sometimes, these financial institutions pass on the wrong information to credit rating agencies. This causes a small business’s credit rating to go down. Small businesses must, therefore, check their credit report from time to time for errors and if they see any error that has harmed their credit rating, they must report these errors immediately as rectifying errors takes time.

Keep Your Personal and Business Finance Separate

Lastly, if you want your business’ CIBIL score to look good, make it a habit to keep your personal and business finance separate. Avail of separate business cards for your business and use them for all business-related transactions. This will help you build your business’ credit history and avail of credit in future.

Final Words

Many small business owners ask us: how to improve CIBIL score immediately. The answer is building a CIBIL score takes time. If your small business CIBIL score is below 75, you will have to follow the tips mentioned in this article and stay on the right track for at least 6 to 8 months to be able to see any concrete changes in your business’ credit report. So, be patient and do not act out of haste.

Also Read: 7 Tips to Help You Improve Your CIBIL Score