Small Business Loan: Why business Credit score matters while applying for it?
No matter how hard you work or how enthusiastic you are about your business, the success of your company would be measured in terms of profits you make. In order to make profits, it is essential that you keep on expanding and growing your business with time. Otherwise, with the cut-throat competition out there in the market, you will lag behind and would end up playing the catching up game. As a small business owner, you might face liquidity crunch from time to time to fund your business growth. In such situations, your best option is to look for collateral-free loans for MSME. Getting a loan would be a relatively simple process for you if you have a good business credit score.
What is a Credit Score?
A credit score is the reflection of your creditworthiness in the market based on your past credit history. It is a three-digit score that helps the lenders assess your credit standing, and they take a decision on your loan application based on your credit score. In India, credit score is considered by financial institutions to assess the credit standing of your business and thereafter process your loan application accordingly. Agencies such as CIBIL gives ratings out of a total score of 900. If your company has a good CIBIL score, i.e. 750+, then your application for collateral-free loans for MSME would be approved quickly.
What factors affect Credit Score?
There are various factors that affect your overall credit score out of 900. Some of the most critical factors affecting your credit score are: –
- Number of loans or credit cards you have
- Payment history of loans and credit cards
- Outstanding debts and duration of overdue payments
- Any default in the payment of EMI’s
- Number of loan applications you have filed
There are many other factors in addition to the ones mentioned above which affect your credit score.
Why is it important?
In the present times, Credit Scores have assumed greater significance, and it is one of the most important eligibility criteria for a loan. When you file an application for a loan, the lending agency will check your credit score. If your credit score meets their guidelines only then will they proceed ahead with your application? This makes a good Credit Score the single most significant factor affecting a loan application.
In order to understand the importance of Business credit score when applying for a small business loan, you should read the following essential aspects of a good credit score
- Impact on available credit: – Having a good business credit score conveys the message that your business has sound financial health and you are a responsible borrower. It reflects that you repay your EMI’s on time and have minimal exposure to debt funding. This gives the lender the confidence that you are a responsible entity and would not default on your EMI payments. Having a good credit score opens up various avenues of funds for you. With a good credit score, you can also negotiate with the lender and get lowest possible interest rates, as their risk exposure is minimal.
- Impact on Future credit: – If your business credit score is below the specified threshold, then you must work towards improving it to secure your business future. A good credit score reflects that all the loans that you have taken in the past have been repaid on time and there has been no major default from your side. This enables the lenders to view your business position favourably and ensures that when in future you need money, the application would be approved quickly.
- Provision for contingencies: – When your business credit score is above the required levels, it ensures that you have easy access to loans and borrowed funding. It, therefore, removes the requirement of you setting up a contingency fund to meet unforeseen future expenses. Without a good credit score your chances of getting a loan are not too high, and then you must depend on personal funds and reserves to meet any contingencies.
- Impact on high-value purchases: –With a good business credit score, you are eligible to avail higher loan amounts to make high value purchases such as machinery, land and building etc. So, you need not set aside a huge chunk of money from your cash flow to acquire these assets; you can quickly get a loan approved, acquire these assets and then repay it in easy monthly EMI’s. Also, with a good credit score, you are offered preferential interest rates which are lower than what others get and thus you can save a huge amount of money on interest payments.
- Long-term financial health: – A good business credit score makes you a preferred customer for the financial institutions. They regard it as a sign that you have good borrowing and repaying habits and are less likely to default on payments. It presents you as a financially healthy entity and provides you access to excellent investment and saving opportunities.
A good business credit score is not only essential to ensure a secure future for your business, but it also opens up other savings and investment opportunities for you. So, it is essential that you keep an active eye on your credit score and take corrective steps as and when necessary to be eligible for collateral-free loans for MSME.