The Importance of Good Credit for Securing a Business Loan

Picture this: you are a budding entrepreneur with a revolutionary idea that has the potential to solve individuals' pain points. You have got a solid business plan, a dedicated team, and a whole lot of passion. You are ready to make your mark and take your business to new heights. The only thing standing in your way? Financing. Unfortunately, securing a business loan for your business is not as easy as it seems. Lending institutions are understandably cautious when it comes to giving out loans, and they are not willing to take risks on just any venture. This is where the importance of a credit score comes in.
 

Importance of your business credit score

 

• Makes you a responsible borrower

  When you apply for a loan, your credit score is the first thing your lender looks at. If they find this aspect satisfactory, then your loan application approval becomes easy. A high credit score indicates that you are a responsible borrower who pays bills on time and manages debt effectively. Lenders are more willing to lend you money because they see you as a low-risk borrower.
   

• Qualify for significant funding

  As previously stated, a good credit score indicates responsible repayment behaviour. It shows your lender that you are not burdened by multiple debts and that you can easily manage any significant funding that is approved for you in the future. This can be helpful if you need to fund a large project or expansion. 
   

• Better loan terms

  Having good credit can also lead to better loan terms, such as lower interest rates and longer repayment periods. This can save you money on interest charges and make it easier to repay the loan, eliminating the risk of default. With a lower interest rate, you will have more money available to invest back into your business, which can help it grow and thrive.
   

• Improve your business's reputation

  Having good credit can also improve your business's reputation. It shows your effectiveness when it comes to debt management. This can be important if you are looking to attract new customers or investors, as they may view your business as more trustworthy and reliable.
   

Also Read: 5 Factors that are Affecting SMEs’ Access to Finance

 

How to maintain a good business credit score?

 
Now that you are aware of the importance of a company’s credit score, here are some ways using which you can improve your business credit score:
 

• Timely bill payment

  Late payments can negatively impact your business credibility. Ensure all company-related bills are paid on time, including rent, utilities, and supplier invoices. Consider setting up automatic payments to avoid missing deadlines. Though utility bill payments are not reported to credit bureaus, paying them on time teaches you financial discipline.
   

• Monitor credit reports

  Businesses frequently make the mistake of not reviewing their credit report regularly. This increases the possibility of erroneous or missing information on your report because of your lender's negligence. Furthermore, as a business owner, you may be vulnerable to various financial frauds, which you can easily avoid by reviewing your credit report at least twice a year.
   

• Establish business credit

  If you are a startup, you might find securing your first loan from lending institutions challenging due to a lack of credit track record. But you need to start from somewhere to build a credit score. Try getting a business credit card or government financing, such as a Mudra loan. Repaying these loans on time not only improves your business credit but also qualifies you for significant funding in the future.
   

• Maintain low credit utilisation

  High credit utilisation can negatively affect your credit score. Aim to maintain a utilisation rate of less than 30% on credit cards and lines of credit. Cutting costs such as unnecessary stockpiling and office outings several times per week can help keep utilisation rates low.
   

• Negotiate payment terms

  Negotiate payment terms with suppliers and creditors if your company is having cash flow problems. This can help you provide enough cash to repay debts reported to credit bureaus and avoid missed payments and late fees.
   

• Monitor personal credit

  Personal credit scores can impact business creditworthiness, especially if you own a small business or operate as a sole proprietor. If you fail to pay your personal loan EMIs on time to meet your business's liabilities, you are negatively impacting both your personal and business credit scores. Another piece of advice here is to keep business and personal expenses separate.
   

• Consider credit repair services

  Consider hiring a credit counsellor if your company's credit score is low due to past financial difficulties or inaccurate information. These counsellors can work with creditors to assist you with debt management, credit report correction, and much more.
   

Also Read: Expand a new business line with Business Loan
 

Final Words

 
Just as a good resume can help a person land their dream job, a good credit score can help businesses secure financing, attract investors, and negotiate better loan terms. It shows lenders and investors that you are a responsible borrower who can manage debt effectively and pay bills on time. In turn, this can help you access significant funding to expand your business, invest in new equipment, or hire additional staff. Maintaining a good credit score requires financial discipline, but the benefits it can bring to your business are well worth the effort.