The reality is most people do not know what a credit score is. Let’s not get into individual/personal scores or SMEs. Both are sailing on the same boat. A credit score is like a birth certificate. You know you have one, you even know the importance, but have you seen it off late? We know you must have not unless you have to submit it as a proof for some activity.
A credit score is a 3-digit number ranging from 300-900, 900 being the obvious highest. When you apply for a loans or credit card, your credit score is checked by the lender in order to ensure that you have the ability to repay. A higher credit score makes you reliable in the eyes of the lender, making it easy for loan approvals. The Credit Reference Agency (CRA) generates this score/number to indicate how reliable you have been with the past payments. Maintaining a credit score is important on individual basis, but is to be done by SMEs also, so that it becomes easy for them to avail SME loan.
We discussed about credit score and stated its importance in order to share information on the vitality of the subject. An individual can easily work on improving his credit score as he’s aware of his financial story.
We would talk nothing like the appalling website popups which make you believe in them, there’s no magic potion to improve cibil score overnight. It is a process and you can work towards improving your credit score gradually. So, it’s in your own interest that you maintain a healthy cibil score to make it smooth and maybe less expensive to obtain small business loan whenever needed.
The SME sector in India is huge. 42.50 million, both registered and unregistered together is the number of SME businesses in India. Collectively, it comes up to a jaw-dropping 95% of the total industrial units in India. It employs a huge workforce and hence considered as the backbone on Indian economy. Most of these organisations face shortage of funds, and they seek monetary aid from financial institutions. These lenders, primarily consider their credit score to determine whether loan should be sanctioned or not, also to decide the offer to be made to applicants.
Following are some effective tips on how you can maintain a good credit score for your SME.
Pay all your dues on time:
You score is determined on the basis of your payment history. Credit bureaus check all your previously made payments to assess or give you a credit score. All your payments are to be paid before the due date, whether they’re credit card bills or loan EMIs. Dues paid before leave a positive impact on your score. Similarly, late or payments done after the due date leave a negative impact on your score. A default can ruin your credit score for a longer period of time & you can face a lot of trouble getting out of it. Even if you manage to get out, a default stays forever.
Your business information should be regularly updated:
We previously discussed on how important it is for a business owner to keep a check on the credit score. The credit bureaus can check any reports; one cannot track or be sure about any of them. Apart from this, as a business owner you also have to make sure that all your reports reflect the correct information of your business so that you get a good score during the assessment. Information such as bank statements, balance sheets, no. of years of operation, size of the company, etc. should be regularly updated as an up-to-date profile gets a higher score. There are multiple credit bureaus so it is suggested that you monitor your scores by different bureaus to take action in time.
Not all lender report to credit bureaus, partner with the ones who do:
All your efforts may be wasted if the payments you do on time aren’t reported to credit bureaus. This will not help you improve score. In order to make sure, lenders report to the credit bureaus, partner with the bureaus who do this activity. Before you enter into an agreement with your lender or creditor, make sure they report your payment history and habits to the credit bureaus.
Monitor credit utilization:
The utilization of the available credit also impacts the assessment of the credit score. Over utilization gives an impression that your business is facing trouble in profit-making. The higher the utilization of credit goes, the lower your score will go. Limiting credit applications can also help.
Personal credit matters too:
Business and personal credit is recommended to be kept separate, but repayments for both are to be kept clean. As the business is in its initial stage, the business has less or no credit history, in that case, loans or credit cards are sanctioned on your personal credit score.
Achieving a credit score will take time, you will have to work for it by keeping your finances under observation. Once you achieve a decent score, it is vital to maintain it as your future credibility is dependent on it. In the initial stage of maintaining a credit score for your business identity or on personal level, things may seem difficult. Don’t give up, go ahead with discipline. Achieving a high credit score is possible, with a strong credit score; you can make your business achieve heights.
FAQs:
1. Why is it important to monitor your credit score regularly?
You can better comprehend your present credit situation by looking up your credit history and credit scores. You can also become more aware of what potential lenders might see by routinely examining your credit reports. Examining your credit reports could also help you identify any incorrect or incomplete information.
2. What are 3 things that hurt your credit score?
Among the three major factors that can hurt the credit score are :
- A credit score can be lowered by simply one late payment on a loan or credit card account.
- Multiple credit applications in a short period of time may influence credit score.
- A high debt-to-credit-utilisation ratio
3. What are the basic components of a credit score?
A variety of credit information from your credit report is used to calculate credit scores. History of payments (35%), amounts owed (30%), duration of credit history (15%), new credit (10%), and credit mix (10%) are the five categories into which this data is divided.
4. How can my credit score help me with a loan application?
If you have a high CIBIL Score, the lender will review the application and examine additional factors to determine whether the applicant is creditworthy. The CIBIL Score serves as the lender’s first impression. The higher the score, the greater your chances of having your loan application evaluated and approved.
5. How do I get my credit report corrected in case of an error?
To correct the error, fill out the form in the Credit Bureau’s dispute resolution section. The credit bureau will contact the bank to confirm the dispute after you file your online complaint form. In most cases, it takes roughly 30 days to resolve the issue.
