Sustaining a strong business credit score for seamless business financing

A strong business credit score is a marker for businesses looking for a business loan. Lenders scrutinise your credit score based on the credit report obtained from a credit agency. Business credit scores determine whether a business can get a loan approved by a lender. Therefore, maintaining healthy business credit scores gauges your capacity to get loans approved and helps in enhancing business financing options.

What is a good business credit score?

In India credit rating of businesses is done by credit bureaus in India licensed by Reserve Bank of India (RBI). Companies are scored between 300 – 900 based on the credit information collected by the bureaus from the lenders.

In general, a minimum credit score of 650 and above is considered a high CIBIL score value which makes you a reliable borrower. Some banks would require 750 and above especially if a business is applying for a big business loan. The minimum credit score depends on the lending policy of the respective financial institution.

Also read: High CIBIL score benefits and why it’s important for SMEs

Factors affecting business credit score

There are several factors that the credit agencies take into consideration while assigning a credit score to your business enterprise. Each of the four credit bureaus (Equifax vs CIBIL vs Experian vs High Mark) licensed by RBI assigns a certain weightage to each factor. The weightage differs among the four agencies as they use their own scoring models for determining the credit score.

Have a look at the factors that are used to calculate business credit score according to Experian:

• History of loan repayment

This is the most important determinant of all factors. Credit agencies first scrutinise the loans you have taken and whether you have paid all your EMIs before the due date. If you have paid up all your business loan EMIs on time, without a single default, then your credit score will be 750 and above.

Just one late payment can do significant harm to your scores. If the credit agency sees an account that has been sent to collections or a foreclosure or a bankruptcy, it can have an even deeper and longer-lasting impact on your credit score.

• Credit utilisation

Credit utilisation refers to the amount of credit that is available to your company that your company can use. It is calculated by dividing total outstanding credit balances (the money owed to the lender for paying up the credit utilised) by the total available credit limit.

If you want a higher credit score you must keep your utilisation rates below 10%. Utilisation rates of roughly 30% or greater tend to negatively impact credit scores. Therefore, maintaining a low credit utilisation rate is a favorable factor while determining your company’s credit score.

• Length of credit history

Credit agencies believe that the longer you have been taking loans from lenders, the better you are at managing your debt. Therefore, a longer credit history is a positive influence on your credit score. Loan accounts you have closed without any late payments remain on your credit report for as long as 10 years.

• Credit mix

If you have multiple debt channels, for instance, working capital loan, machinery loan and business credit, your credit scores will be higher. This is because credit bureaus believe that you have the ability to successfully manage multiple debts and different credit types.

• New credit

When you apply for new credit, you often make several credit inquiries. Multiple credit inquiries within a short period are viewed as a sign of credit risk. Therefore, it is recommended not to apply for multiple new credit accounts within a short timeframe.

If you have been sanctioned multiple loans and credit cards within a short period of time lenders know that your debt burden has significantly increased, and this will impact your credit score negatively.

Also read: 9 Factors affecting your CIBIL score value for business loans

Weightage given for each factor

According to Experian, a credit rating agency licensed by RBI these are weightages given for each factor:

Factor	Weightage
Payment history	35%
Credit utilisation	30%
Length of credit history	25%
Credit mix	10%
New credit	10%

These weightages must be taken into consideration while making strategies for a strong credit score.

Steps to improve business credit score

There are several ways that businesses can try to sustain a strong business credit score:

• Pay your EMIs on time

One of the best ways of sustaining good business credit value is by paying all your loan repayments on or before the due date. Late payments will not only impact your credit score but lead the lenders to think that you cannot be trusted with money.

• Keep business debt low

As a business you might have a business credit card from which you are availing credit, term loans and other credit lines. If you have multiple loans running at the same time, it negatively impacts your business credit score.

• Lower your credit utilisation

According to credit rating agencies, one of the most important steps to ensure a good credit rating is to ensure that the credit utilisation ratio of your business does not go beyond 30%. This is generally practiced in cases of overdraft loan accounts, cash credit loan and other types of loans that allow you to withdraw sums in parts.

For example, you have a cash credit loan of ₹7 Lakh. As a good credit practice, you should use 30% of the sanctioned loan limit, which is, ₹2.1 Lakh and then repay the utilised loan amount before taking more credit from the same cash credit account.

• Check your credit report regularly

Make sure you apply for a credit report and check your credit score and rankings. You must do this at least once a year if you have multiple credit lines open for your business. While scrutinising your business credit report, look out for these aspects:

• Loan defaults
• Multiple credit accounts
• High credit utilisation ratio
• Bounced cheques
• Negative cash flows

How to check business credit score?

Each credit bureau has a different credit rating methodology and therefore, your scores might slightly differ with each agency. You can easily visit the websites of credit agencies mentioned above and apply for a credit report. You can even register to these platforms by buying a subscription to keep a periodic check on your credit status.

If you are looking for a business loan, visit Tata nexarc Business Loans. We have minimal documentation requirements and a simple online application process. A subscription to our platform can give you access to lenders across India featuring various loan products tailored small business needs. A single loan application on our platform can match you to loan products from multiple lenders.

Also read: Can I obtain a loan without CIBIL score?