Your credit score is important when it comes to applying for a loan. As an individual who is applying for a personal loan, you have ways and means to change or improve your credit score if it’s below 700.
This is your personal credit score.
What about your business credit score?
Now, it is a fact that if you want to run your business without any hindrance, you will need money. Unless you and your business are swimming in a pool of money, you will need some monetary help.
The whole idea of having a credit score is so that a financial lender knows that you are capable of repayment along with the interest. Thus, before extending the loan the lender seeks your credit score from an authorized credit bureau.
When it comes to business loans, the idea is the same.
A credit bureau ties up with the numerous lenders who send information to the credit bureau on business loans they have extended to various borrowers including you. The credit bureau then uses the information and arrives at a score called as the credit score for loans taken for personal reasons and company credit report (CCR) for business loans.
Getting the basics right
Let’s start with the basics. When you look at the term company credit report you must be wondering what’s the difference between the score and the report?
If you want to avail a business loan then your financial lender like Tata Capital will seek a company credit report (CCR) of your business from the credit bureau. CCR is basically the credit history of your business along with other pertinent information.
The information on your business covers a wide range of data points that include
- History of your various business loans in terms of business loan amount, interest rate, repayment record, defaults in repayment
- History of you acting as guarantor to loans availed by other people/business
- History of the profile of your business – statutory information that includes the name of business, ownership pattern, statutory registrations, PAN number, contact details
Based on the above information, the credit bureau reports the CCR using a scale that is unique to the credit bureau.
When you are applying for a loan for business, your lender will seek a whole lot of information from you on your business that is relevant to the running of the business including among other basic information the financial health of your business with all the necessary information on income, expenditure, profit and loss statements, financial ratios and the business loan history that help to determine your creditworthiness. In order to corroborate the information you provide, the lender also seeks your CCR from an independent credit bureau.
Now that you have understood the contours of the CCR let’s see how you can improve your CCR score.
Make prompt payments
Making prompt payments on each and every business loan you have taken is paramount to improving your CCR. Even if you have some minor defaults in the past, you can correct it by being prompt in your payments in the future as the credit bureau updates the CCR periodically (6-12 months).
Avail loans only when necessary
Don’t be extravagant and apply for business loans just because there are lenders who will extend loans to you. Evaluate your fund’s requirements thoroughly and see if you can fund it from internal resources. If they are not sufficient only then apply for business loans as required. Don’t over borrow and don’t apply frequently and show your propensity to seek loans.
Avoid frequent business loans
It is better to think out your loan requirement and plan it accordingly so that you can aggregate small loans into a bigger loan so as to eliminate the need for small frequent loans. When you apply for business loans frequently, the applications adversely affect your CCR.
Sparingly use when you apply for unsecured loans
Unsecured loans are detrimental to your CCR. Use them sparingly and only when necessary. Your business itself can provide enough collateral and use the same to avail secured loans.
Don’t use up your entire credit limit
While you can seek a higher loan amount and obtain sanction for the same, do not use the entire credit limit. Keep something in reserve. It helps to improve your CCR.
Check your CCR periodically
Ensure you check your CCR periodically to see that the credit bureau has not made any errors while deriving your CCR. Often, the lender could have reported incorrect information on your business. Take care to see that the lender reports the correct picture. If you find errors rectify them immediately and obtain a confirmation from the credit bureau and use that in your application for a business loan.
Use CCRs of stakeholders in your business
It makes sense to conduct due diligence of your vendors and customers and seek their CCRs so that you can ascertain the soundness of their business health. If they are sound and supply your requirements promptly your own business will succeed. The same thing is true for your large customers. If you are extending credit to them, then do check their CCRs before you do so.
From the foregoing, it is clear that if you run your business professionally you will improve your financial health tremendously obviating the need to apply for business loans frequently. A sound business means that you take care of all parts of your business properly including the need for finances through business loans when absolutely necessary, and that you are capable of repaying the business loan promptly. A sound business means excellent CCR.