Introduction
The Small and Medium Enterprises (SMEs) sector is considered the backbone of the Indian economy as it employs a huge workforce. Small firms all over the country, even with their limited resources and small investment figures, act as a dynamic force that is leading to bigger and better innovations. However, most of these organizations with no deep pockets, keep battling with capital crunch and often knock the doors of financial institutions seeking monetary aid. The lenders then consider the credit score of the applicant to determine whether to sanction the loan request or not.
Why is it necessary for an SME to maintain a favourable credit score?
Credit scores are evaluated on parameters like credit utilisation ratio, credit history, company size, industry risk, and public records among others and different credit bureaus evaluate it differently. However, one thing remains constant – the importance of high credit score as it indicates that your business is booming and you are in a suitable position to repay the loan on time. High credit score also means the lender will be willing to lend you a higher amount or offer a better interest rate. Its importance lies not only in getting a loan but also in developing a good rapport with investors, suppliers, clients etc. As unlike a personal credit score, which is private, the business credit report can be looked up by anyone involved in dealings with the business owners. This means that the credit report is not just a proof about your financial stability; it establishes your credibility in the market as well.
Five ways in which an SME can maintain a favourable credit score
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Make timely loan payments: Credit bureaus look at your history of making payments to the lenders to assess your credit report. To maintain a good score, it is pertinent that all the dues – loans and credit card bills - are paid before the deadline. In fact, if the repayments are made a little early, it reflects positively on the report. Similarly, late payments have a negative impact on the credit score. A major default or bankruptcy claim can ruin your credit score for years.
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Update your business information regularly: As a business owner, one has to keep an eye on the credit score reflected by every credit bureau as one cannot be sure as to which report the vendors, creditors or customers might be checking. Needless to say, one has to try and maintain a good record across all the credit bureaus. To make sure these reports are reflecting the correct facts, the business owner should keep updating the information about the size of the company, number of years in operation, bank statements, balance sheets, etc. regularly as an up-to-date profile gets the higher credit score. Also always monitor your credit scores by different bureaus to take corrective measures in time.
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Partner with lenders who report to credit bureaus: All your efforts of repaying bills and loans on time will have little effect on the credit score if the lenders don’t report that to the credit bureaus. So, before you enter an agreement with a creditor or a supplier, make sure they will be reporting about your payment history and habit to the bureaus.
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Keep a check on your enterprise credit utilization: How you utilize the credit also determines the business credit score. Overutilization of credit gives the impression that your business is having trouble making profits. As credit utilization increases, the credit score goes down. Also, limit your credit applications.
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Make sure that your personal credit is intact: Though finance experts recommend keeping the business and personal credit separate, it is vital to keep repayments strong and steady in both cases. In the initial days of business especially in cases of startups when the business has little or no credit history, business loans or credit cards are sanctioned on basis of personal credit score.
Get your finances back on track first to gradually build up your credit report. The credit score will improve over a period of time by keeping your finances in check, avoiding defaults on loans and maxing out your credit cards etc. Once a decent score is achieved, it is necessary to maintain it as future business deals and the company’s credibility depends on it. It may appear difficult at first but with discipline, a high credit score is quite achievable and with a strong credit report, the business can make bigger breakthroughs.
