How to Improve Your Business’ Creditworthiness

Posted by Ankit Shrivastava
May 26, 2017

Self-Published

Running a business requires balancing risks with returns, and sometimes you need to take certain hard decisions in terms of financing your business. In the world of small and medium enterprises (SMEs) especially, opting for a line of credit such as a business loan is a common approach taken by businessmen to increase their cash flow. In business, you will often spend a good deal on paying suppliers, dealing with customer requests and streamlining infrastructure, leaving little leeway for working capital. Or a sudden business expense may crop up, making day-to-day cash liquidity a challenge. It is, therefore, important that you maintain your business credit ratings at optimum, in the event that you have to turn to a business loan for financing.

What is Business Credit Worthiness?

Business credit worthiness is determined in the form of a business credit rating, assigned to your business by a centralised trade or credit agency. A credit agency generally grants a rating to a company after evaluating documents submitted by the applicant. The rating is issued after extensively evaluating the documents and interviewing your company’s management team.

In India, CIBIL maintains a CIBIL Company Credit Report or a CCR, which refers to a record of the credit history of your company. It is not exactly a credit rating but is derived from the information that is directly submitted by your bank. Both the CCR and credit score can determine whether or not you are eligible for an SME loan.

Why Build Business Credit?

Poor credit worthiness is understandably viewed by banks as a risky investment. If yours is a company with a low credit score, you have reduced chances of availing a business loan or an SME loan. In effect, your credit rating or credit report is a symbol of your company’s financial health. It is, therefore, important that you check your credit score by obtaining your credit report from a reputable institution. A number of credit reference agencies offer these services; else you can turn to CIBIL for their CCR. CIBIL’s Company Credit Report is often relied upon by loan providers to evaluate and address loan requests. Make it a point to check all your details, such as company size, business structure, balances of accounts, payment promptness, credit history length, risk levels of industry, credit utilisation and public records such as bankruptcies etc. Incorrect details can have a direct, adverse impact on your credit score. Hence it is crucial that you correct even the minutest of mistakes by reaching out to the authorities on time.

How to Build a Worthy Business Credit Rating

Building strong business credit worthiness is not an overnight task. It requires you to have a worthwhile credit history over a significant time period. You must pay close attention to the credit, debit and cash flows by periodically analysing your credit score.

Here is a concise guide to building a strong credit rating for your business:

  1. Register your business: Registering your business as a formal entity is the first step towards building creditworthiness. The formal establishment of your business is an indication about the seriousness and sustainability of your business. Remit the bill payments in your company name, even if you are working out of your home. Having formalised company details such as address and phone number go a long way in giving your lender the required confidence to offer you a business loan.
  2. Separate personal from business: Most people worry about how to build business credit worthiness, especially if their personal credit history is poor. The answer lies in maintaining separate representations for both. For example, separate your business account from your personal account. Timely payments made through your company account will help improve your credit rating. However, in the situation that you have just started out, the bank or lender may not find enough information about your company. They will then evaluate your personal credit history. It is, therefore, important that your personal credit history is also healthy and in place.
  3. Avail a business credit card: Getting a business credit card exclusively for your business can inculcate a habit of on-time payments if used in a disciplined fashion. A business credit card that is promptly paid every month is a great asset in building business credit worthiness. Additional benefits such as reward points can add to the cost advantages too.
  4. Pay bills in a timely manner: Paying bills beyond the provided deadlines is not recommended when it comes to building creditworthiness. Also, timely payments will help you build good relationships with your creditors.
  5. Limit usage of credit: A situation where you owe significant money to banks and other lenders directly lowers your business credit rating. Make sure you keep your debt levels as low as possible, which will, in turn, lower your credit utilisation and increase your credit rating.
  6. Assess your cost structure: Evaluate your business expenses periodically, demarcating the “essentials” from the “add-ons”. At the outset, aim to operate a lean business with the bare basics in place. Optimise your inventory, downsize when business is slow and check equipment efficiency. This will help you move towards profitability faster and will also add to your image as a sound business person, thereby enhancing your chances of seeking a business loan.

Building positive business credit worthiness is a slow and steady process. Once you become credit-positive, it is important that you sustain the credit practices that helped you reach there. To know more about how to best utilise credit options, you can visit fintech lenders online who are introducing innovative ways to forward credit, especially to small businesses that are strapped for funds and cannot offer collateral in exchange for a loan.

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