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

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.