If you run a business, you are mostly likely to need credit backup at some point of time. This is exactly where your business’s credit score comes into the picture.
Just as every individual has a credit score that determines his or her creditworthiness, businesses too have credit scores. This is vital for a company’s healthy growth and success. This score helps lenders and creditors gauge how creditworthy your business is and whether it will be able to payback on time. If you plan to take a loan for your business, you will need to build a healthy credit score. Even though there is no guaranteed method to improve your credit score, here are a few steps to ensure that your business credit report reflects the best possible score.
But first, let us understand the basics.
What is Business Credit Score?
Business Credit Score is a number used by lenders to evaluate the credit risk of your business and decide whether to provide you a loan. It is also used by suppliers and other business creditors to determine whether your company will clear its dues on time.
Also known as
Company Credit Report in India, it offers information including business identification, profile, credit history and past enquiries.
Why Do You Need a Good Credit Score?
A good business credit score reflects creditworthiness and helps lenders decide whether your business is a good candidate to receive a loan or not. This score helps in deciding the terms and conditions of the loan and fixing the interest rate as per the credit risk profile your business.
A part from getting easy access to finance, suppliers prefer to trade with businesses that have a
good credit score. You can negotiate favorable terms from suppliers based on your credit score, which is essential for ensuring competitiveness in the market.
A good credit score will build business reputation, whereas, a relatively lower score might affect the stature and limit market access.
How is Business Credit Score Calculated?
The business credit score is derived through complex statistical models and is based on numerous factors of your business credit file. Each credit bureau follows a different methodology to score businesses, but the factors remain more or less the same.
Following are the factors that determine business credit score:
- Years of business existence
- Outstanding liabilities
- Line of credit applied for in the last one year
- New credit lines opened in the past year
- Credit Utilisation Ratio
- On-time payment history
- Collection and tax liens in past one year
- Business trends
How to Improve your Credit Score?
A high credit score is favorable for any business in the long term as it enhances growth and increases competitiveness. While improving your credit score is not an overnight process, you can take immediate steps to increase your credit score.
Here are six ways to improve your business credit score:
Study the Credit Report
The first action towards improving your business credit score is to study the credit report in detail. Chart out the areas in need of improvement and any disputable points on the report to plan your action. Reorganise and address all the areas of concern, which can immediately boost your business credit score. It is recommended to review your business credit report regularly and understand the impact of different credit accounts on your credit score.
Paying Bills on Time
This factor has a major contribution in the calculation of business credit score. Delays in payment of bills will adversely impact your business credit score and hamper the reputation of your business. Inculcating the habit of paying dues well before the due date will enhance the reputation of your business and improve credit score.
Limit Credit Usage
The credit utilisation ratio shows the current usage of revolving credit compared to the sanctioned revolving credit limit. While it is important to have open credit lines for business growth, it is advisable to keep the rate of utilisation below 30%, to maintain good credit score.
Here are ways to Lower Credit Utilisation Ratio -
- Pay off some of your credit balances
- Increase your credit limit
- Pay off your bills more than once a month
- Decrease the money spent on credit-basis
- Open a new credit line, but do not use it
Check for Errors and Dispute them
Working with credit reporting agencies and lenders to dispute any error and remove negative comments is an important call to action. A simple error can leave a massive dent in your credit score. Therefore, it is important to make sure that the information reported in the credit file is error-free and up-to-date.
Establish Credit Lines with Suppliers
Establishing new credit lines with suppliers with whom you have a good payment relationship will improve business credit score. This helps to increase the number of positive payment cases in your credit file, which will improve your credit score.
Avoid Closing Old Credit Lines
Closing your old credit accounts and removing it from credit files is not advisable and this is one of the most common mistakes small business owners commit. A credit account maintained for several years shows signs of confidence in your business and indicates stability. A general thumb rule is that, the older the account, the greater the positive impact on credit score. Removing it from your credit file adversely impacts the credit score as favourable credit history is lost.
Conclusion
As a small business in India, it may often get difficult to find good financial lenders, at the time you need most. A good credit score will come in extremely handy at those moments. Building a healthy score takes time and that is why it is important to start as early as possible. Whether you would need a loan in future or not, it is best to create a safety net for the days to come.
