For new business owners seeking to start their business or a medium, small and micro enterprise (MSME) wishing to explore new business opportunities to grow, it is necessary to know that strong creditworthiness is imperative to qualify for credit from formal lenders to achieve your goal. business goals.
Here’s what you need to know about common mistakes an MSME should avoid in order to stay creditworthy for business loans.
What is a business credit score?
Your business credit score is calculated based on your credit behavior over the past 36 months. If you have not received any loans during this term, the credit bureau will not be able to assign a credit score due to lack of data.
The credit behavior of the owner and his personal credit rating, in the case of a partnership and a sole proprietorship, also matter when the business is evaluated for lending.
Therefore, it is better if the business has a loan, or the owner has credit card charges, and they are paid back on time, so that you can have a good score when you need to opt for a loan.
Whether investing in new equipment, expanding the business, or paying off supplier credit, every business owner may need to take out a loan at critical times in the life cycle of their business. However, if your credit rating is low, many banks and lending institutions will not approve your business loan application.
Your credit score would also have an impact on the interest rate and loan structure you will get from Non-Banking Financial Companies (NBFC). Therefore, it is imperative to understand which mistakes could impact your business credit rating.
Mistakes to avoid for a good business credit score
High loan origination intensity
Credit rating is affected if a business owner takes out too many loans in a short time. This is seen by lenders as a sign that the customer is craving credit. Using too many unsecured loans can set off red flags with lenders. It is therefore necessary for business owners to use a combination of unsecured and secured loans.
Guarantee a third-party loan
If a business owner stands surety for a loan taken out by a third party and that third party defaults, the business owner/guarantor’s credit rating could be affected even if they do not repay that loan directly. .
By acting as a guarantor, you agree to be responsible for repaying the loan. First, avoid giving such guarantees. If you must, you should be very careful when giving the guarantee, as someone else’s behavior could impact your score. And if you did, push the person to meet repayment deadlines.
Not monitoring and updating credit report
Another common mistake people make is ignoring disputed amounts on the credit report. For example, if no action is taken on incorrect contributions, the amount would start accumulating and earning interest. This would then turn into a large sum and be reflected in your outstanding credit. Do not ignore any disputed amount and follow up until it is fully resolved.
A business owner should also monitor his company’s credit profiles on a regular basis and not just once viz. monthly, or quarterly. Going through the credit report is a must to understand the reasons for the low score.
If there are irregularities that can be reflected in the credit rating, it is all the more important to raise the dispute in time because improving a low rating takes time. Some examples of such irregularities are that a loan may be mistakenly assigned to the business that the business did not take out, or that a loan that has been fully repaid may not be marked as “closed” by the lender.
Apply for loans from multiple lenders
When applying for a business loan, applying to too many lenders at once does not work in your favor. It is important that you only apply if you are fairly certain that your application will be approved. It’s also wise to limit your loan application to just a few lenders when making inquiries in a short period of time.
If you work with a direct sales agent or referral agent, when submitting your loan application, communicate clearly and make sure they only send your loan application to a certain number of lenders. Be aware of too many loan applications; every inquiry on your credit report is noted and too many of them will lower the credit score.
Restructuring of a loan
When companies opt for a loan restructuring, it also appears as “restructured” in their credit file. Banks and NBFCs are reluctant to lend to these MSMEs. Any relaxation or waiver of loan terms signals to lenders that the MSME is unable to repay.
A good credit report based on a company’s timely repayment and responsible financial behavior tells lenders that the company is a creditworthy borrower. Lenders give pre-approved loans to these customers, and a higher loan amount, no questions asked. The loan process becomes smoother. Is there a downside, one might wonder? Not at all. So, follow these tips and boost your credit score before you qualify for your next loan.