As a small business owner in India, you probably know that keeping a sound credit score is integral to securing a business loan. This is because it tells the lender how trustworthy you are. A high credit score indicates that you pose minimal risk to the lender. So, getting a business loan approval would be a breeze, provided you meet the other standard requirements of the lender – such as annual revenue and overall business experience.
A low credit score, on the other hand, will make it very difficult to get an unsecured business loan, even if you meet or exceed the other requirements.
Exactly, what is a good credit score?
The credit score scale ranges from 300-900. Anything above 750 puts you in good stead to secure a small business loan in India.
How can you check your credit score?
In India, there are six primary credit bureaus to perform credit assessments. They are CRISIL, CIBIL, ICRA, Equifax, CRIF High Mark, and Experian. You can log into any of their websites and check your credit score, before you apply for a small business financing loan.
What can you do if your credit score is low?
A good credit score is the first thing a lender looks for in your business loan application. It is a measure of your ability to clear your debts on time, based on your past transactions. A poor credit score or the lack of one severely dent your chances of seeing the stamp of approval on your business loan application form.
But it is not the end of the road. Even if your present credit score does not cross the threshold mark, there are ways you can rely on to improve and maintain it.
Let us look at 6 of the most important ways:
1. Keep Regular Tabs on Your Credit Score
Many people make the cardinal mistake of checking their credit score right before they are in need of easy small business loans. This might not give them enough time to deal with a negative remark on their credit score report. On the other hand, checking your credit score periodically – once every 4 or 6 months – will give you ample time to take the necessary steps to counter situations like these, much before applying for a finance for business.
Also, there is a misconception that checking your credit score affects your rating. The reality is when you check your credit score, it is considered a ‘soft inquiry’. Unlike a ‘hard inquiry’, a soft inquiry does not affect your credit score and is not visible to lenders.
2. Pay ALL Your Debits Timely (even the ones you consider small or insignificant)
Your unpaid debts – credit card bills, EMIs – can be a major roadblock to your application for finance for a business. Any payment defaults will drag your credit score down. Be it a cash crunch scenario or a case of missing the due date, you will eventually lose out on getting a small business loan.
So to avoid such scenarios, ensure that you set reminders for all your monthly payments. You can turn to technology such as mobile phone applications to assist you in this regard. As far as cash crunch scenarios are concerned, effective budgeting beforehand can help you stay out of it.
3. Avoid Simultaneous Loan Applications
Applying for small business financing loans to multiple lenders in a short time span reflects poorly on your credit score. In such cases, your credit score report will throw up multiple “hard inquiries” – inquiries made by lenders, which will adversely affect your credit score. To a prospective lender, you will come across as a credit hungry person.
Multiple business loan applications can also indicate that your debt burden may increase in the future – a red flag for lenders.
4. Be Wary of Joint Loan Applications
To increase the chances of a business loan application being approved, many turn to joint loan applications for business capital loans. Although this method does improve your chances, what you may miss is a possibility that your co-applicant makes a mistake leading to a default in payment. This will affect your chances of getting small business loans online.
5. Keep an Eye on Your Credit Card Utilisation
For all your credit cards, you have to adhere to one simple rule – do not allow your card utilization to breach 30% of the total credit card limit. This will keep your credit scores stable. A high credit utilization limit can also indicate the possibility of a looming debt burden. If your credit utilization is high, take steps to lower it. Be financially disciplined and avoid using your credit card for all your purchases. Excessive usage allows the lender to look at your spending habits, something best kept to yourself.
A tip – Ask your credit card company to alert you if you are closing in on the utilization limit.
6. Take A Loan
At first glance, this may seem counterproductive. But, it is actually a very effective way to boost your credit score. This is especially handy if you don’t have a credit score at all. Remember –having no credit history doesn’t qualify you as a good candidate to receive a quick business loan. This is because the lender will have no idea if you can repay on time.
So, take an easy business loan an unsecured business loan is a better option if you don’t want to risk a mortgage. Pay your installments on time, and if you can, try to close the business loan early. This will help you build your credit score.
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