Demonetization, its Advantages & Points to Note
Everyone in India and abroad was surprised by the government's announcement to replace existing currency notes of Rs. 500 and Rs.1,000, which accounts for alm . . .
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 past 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 score miss opportunities to run their operations smoothly. Your business may get negatively affected if the credit score is poor, due to the following reasons.
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, which can be a major problem during financial emergencies.
High interest rates
Before you apply for a business loan with bad credit score, you should know that lenders charge interest rates based on how risky the loan is. For businesses with bad credit score, 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 in 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 score, and managing the distribution might become challenging if the operations aren’t smooth due to lack of funds.
Ways to improve credit score
Wondering how to improve credit score? First, you need to know that credit scores are based on the loan repayment history, 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:
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.
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.
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 upon 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.
The act of paying out money for any kind of transaction is known as disbursement. From a lending perspective this usual implies the transfer of the loan amount to the borrower. It may cover paying to operate a business, dividend payments, cash outflow etc. So if disbursements are more than revenues, then cash flow of an entity is negative, and may indicate possible insolvency.