How does bad credit affect your business and how can you improve it

  • Unsecured business loans
  • 01 Apr, 2020
  • Manya Ghosh
  •    1,696

Running a business is all about grabbing the opportunities that come on your way and establishing a brand name that exudes trust and quality. To be able to seize opportunities immediately and expand the business, it is important to get sufficient funds at the right time. This is where your credit score comes into play, especially if you are looking for a loan. A good credit score can help you get loans more easily and at lower interest rates, unlike a bad credit score. In other words, getting a business loan with bad credit can be difficult as financial institutions take your loan history into account while evaluating your eligibility for any kind of loan.
 

How does bad credit affect business?


Businesses require a strong credit score to get easy access to loans and other types of financing. Businesses with bad credit scores miss opportunities to run their operations smoothly. Some of the ways your bad credit score can impact your business include:

 

  • Difficulty in qualifying for loans

    A poor credit score potentially hampers the ability of the business to qualify for loans as the lenders are sceptical about your repayment abilities. A poor credit score implies a higher possibility of default. Hence, getting a loan application approved with a bad credit score is difficult and that can be a major problem during financial emergencies.
 
  • High interest rates

    Before you apply for a business loan with a bad credit score, you should know that lenders charge interest rates based on how risky the loan is. For businesses with bad credit scores, the interest rates charged are generally higher and the payment terms are stricter too. Naturally, this increases your loan burden.
     
  • Utility and distributor problems

    Bad credit can result in higher utility costs due to the poor credit profile maintained. There is a danger of falling into a debt trap when too many loans are taken and credit is required just to be able to make interest payments. Managing the supply chain might become more difficult with suppliers refusing credit due to poor credit scores, and managing the distribution might become challenging if the operations aren’t smooth due to a lack of funds.
     
Also Read: A Complete Guide to Collateral Free Business Loans
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Ways to improve credit score

 
Wondering how to improve your credit score? First, you need to know that credit scores are based on the loan repayment history, the number of years in business, lines of business credit applied for in the past few months, and any tax liens against the business. For businesses weak in any of these categories, the credit score may be hampered. Also, if you are wondering what is a good credit score, a score of 700 or above by a reliable rating agency is considered appropriate. So, here’s what you can do to improve your credit score:
 
  • Check for any discrepancies

    You must track your credit report at least twice a year. Even if you have multiple loans in the name of your company and pay your dues on time, your credit score may still be low. In such cases, there is a good chance that your credit report has an error. Download your report to identify if there is any omission to your paid EMIs. If you find any, ask your lender to rectify them immediately. 
     
  • Pay more than minimum

    Another way to improve your business loan eligibility or better say, improve your damaged credit history is choosing a partial prepayment at regular intervals. Though prepayment comes with a certain prepayment penalty, it is still regarded as the best option to improve your credit score. Although prepayment carries a prepayment penalty, it is still considered the greatest way to enhance your credit score. Prepayment shows lenders that your business is doing well and that it has recovered from earlier setbacks that resulted in EMI skips.
     
  • Apply for a credit card

    To start with, apply for a business credit card. Use the card responsibly, well within the limits, and always make the EMI payments on time. This will help in establishing a good credit score.
     
  • Track your credit utilisation rate

    Credit bureaus often scrutinise how you use your available credit limit. For example, if you have a business credit card with a monthly limit of Rs 1 lakh, the credit bureaus will consider you a risky borrower if you use around Rs 50,000 each month. Maintain a credit utilisation ratio of less than 30%. Exceed this limit only if it is really necessary, and make sure you pay your bills on time.
     
  • Start a business line of credit

    For businesses requiring more credit on a day-to-day basis, it is better to opt for a business line of credit. It will help you get a higher amount of credit at a potentially lower rate. Responsible use of this facility and on-time payments can help you improve credit score and establish a good credit history.
     
  • Manage your business loans

    Managing long term and short term finances can be tricky for businesses. For long term credit requirements and permanent working capital requirements, the business can opt for a business loan. For a business with a bad credit history, it may be difficult to find lenders who are ready to give loans based on the credit score. In that case, it may be better to showcase the projects in which money is going to be invested, and the potential revenues from the same.

Also Read: Can A Personal Loan Help You Improve Your Credit Score


Conclusion


Now that you know how to increase credit score for your business, follow the tips discussed and get ready to create an impressive credit history. While a bad credit score is something businesses should be worried about, it is never too late to start working on managing finances and boosting the score responsibly. Regular and timely payments are the most important things to be taken care of along with proper debt management to make the most of the finances received and build a good credit score. This will pave the way for quick loan approvals in the future and the interest levied will be low too, which in turn will lessen your burden.
 
Disclaimer:  This post was first published on 1 April 2020 and has been updated for the latest information, freshness, and accuracy.

 

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Written by  Manya Ghosh

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Manya is a seasoned finance professional with expertise in the non-banking financial sector, offering 3 years of experience. She excels in breaking down complex financial topics, making them accessible to readers. In their free time, she enjoys playing golf.

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