1 Challenge
- “My business credit score is very low, so lenders keep refusing to give me credit.”
2 Questions
- “How can I increase my credit score?”
- “How can I maintain a high credit score?”
3 Ideas
- Manage Your Debt
- Maintain Low Credit Balances
- Keep Old Credit Accounts
If you run a business, at some point, you will need credit (aka loans). And to get this credit, you will need a healthy credit score. A good credit score makes it easier to get a business loan from a bank or a Non-banking Financial Company (NBFC). To know your credit score, you need to get a Credit Information Report (CIR). In India, many credit bureaus provide CIRs, including TransUnion CIBIL, CRISIL, Experian, and Equifax.
A credit score is a three-digit number calculated based on the information on your CIR, such as your credit and payment history, type of previous borrowings, credit utilisation history, etc. If you apply for any kind of business loan, the prospective lender would first check your credit score before deciding whether to sanction the loan (also known as extending credit) to you.
The higher your credit score, the more financially healthy your business is considered, and the more likely you are to successfully get the loans you need. That’s why it’s important to have – and maintain –a high credit score.
Here are 3 ways to boost your credit score.
1. Manage Your Debt
All businesses have some kind of liabilities on their balance sheets. In fact, it’s impossible to run a business without one or more liabilities. Your company may have liabilities such as accounts payable, notes payable, or bank debt.
If you want to maintain a good credit score and increase the chances that you will get loans in future (and you will need them!), you must manage your current liabilities. Your CIR will list all your liabilities including:
• Credit lines
• Term loans
• Any secured or unsecured loans
• Credit card balances
Now ask yourself:
i. Are you paying off these liabilities/debts on time?
ii. Are you maintaining a good credit repayment history?
iii. Are you taking on – or applying for – more loans without repaying the previous ones?
If you said Yes to #1 and #2 and No to #3 – you’re in a good position to improve your credit score and get future loans. If not, you must review your current debts and take action to repay them (or at least manage the repayment process) as soon as possible.
All lenders are wary of business borrowers who are highly indebted, or have a patchy credit repayment history. So before applying for a new loan, make sure you manage these aspects, and first boost your credit score.
2. Maintain Low Credit Balances
To maintain a high credit score, your credit balance should be low. In general, credit utilisation of 30% can help you increase your credit-worthiness and credit score. Per this calculation, if you have a credit line of Rs. 1 crores, you should have utilised a maximum credit of Rs. 10 lakhs.
Any amount you repay from this utilised amount will reflect positively on your credit score. However, if you withdraw more than 30% from your credit line, your credit score will start to fall. The more you withdraw, the more the score will fall.
Technically, you can withdraw more than 30% if your business is in need of funds. But to maintain a high credit score, you should try not to go above the 30% limit. For this, it’s crucial to keep an eye on your finances, cash flows, inventories, and anything else that might create a need to borrow more funds on credit.
Also, the 30% limit is not set in stone. Different credit bureaus use different credit utilisation figures. For some companies, up to 50% credit utilisation is acceptable (“green”). Utilisation above this amount gets flagged in different colours, indicating the falling credit-worthiness (and therefore a falling credit score) of a potential borrower. Check the credit utilisation of the credit bureau who prepares your CIR, and plan accordingly.
3. Keep Old Credit Accounts
Some businesses do a periodic review of their credit accounts, and cancel old accounts if they are no longer “required”. You should refrain from doing this if you want to maintain a high credit score.
All lenders prefer to lend to borrowers who can show a long credit history. So if in the past, you have borrowed funds on credit and repaid them in full and on time, it will show up on your CIR. The longer the history, the more comprehensive and favourable the view of your credit-worthiness and debt repayment capability. A credit account that’s at least a few years old is a good proxy for the stability and financial worthiness of your business. It also shows that your lenders, and even vendors, suppliers, and other third parties, trust you and your company. All of this translates into a healthy credit score.
Conclusion
Many Indian companies struggle to get the credit they need to expand the business into new markets, product lines, or geographies. One of the main reasons for this is a poor credit score. It’s vital to maintain a healthy credit score if you want to increase your company’s chances of successfully borrowing funds in future to help your company expand, scale, and grow. To boost your credit score and credit-worthiness, make sure you follow the 3 strategies explained in this article.
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