The Top Benefits Of Having A Good Business Credit Score

Banks and non-banking finance companies (NBFCs) advance money to borrowers based on either some collateral as a security or after assessing the credit history of the loan applicant.

For smaller-sized unsecured loans, it is the credit score that becomes an important factor in a lender’s decision on the application. This credit score can be of the business owner and or that of the enterprise.

Credit Score And Its Importance

In simple terms, the credit score captures the credit history of a borrower, especially for the most recent 36 months. It scans through the existing or old loans and looks at the behaviour of the borrower.

This is with respect to whether there are far too many outstanding loans that could affect their repayment and, more importantly, if there have been any defaults in meeting the equated monthly installments (EMIs) in the past.

For borrowers, be it an individual or a business entity, even if they themselves have not availed a loan but have guaranteed a credit facility—an entrepreneur for a previous business loan or a business entity to say a supplier or sister company—that is also covered in the business credit score.

Notably, the credit score also captures the history of credit card usage, whether personal or business. The point to remember is that one doesn’t need to pay the amount due every month to get a clean record. If the minimum dues out of the total every month are paid on time, then that is considered good enough.

The credit score is represented by a three-digit number that varies between 300 and 900. The higher the number, the better is the score. Conversely, if the score is low then advancing money to the borrower is seen as risky.

The score is calculated by independent credit information bureaus. Some of them have a different parameter for a business credit score and come out with a rank that ranges between 1 and 10. The closer a company is to number 10, the better is their credit history and vice versa.

When a business has been in operation for just a few years, the size is very small or represents that of a professional, say a consultant, lenders prefer to check credit score of the business owner. In other cases, where the organization is more mature, they may insist on scrutinizing a business loan application with the business score or ranking.

Why A Good Business Credit Score Can Be Beneficial

There are various advantages of having a high business credit score.

• Swift Loan Approval:

Lenders use credit scores as a primary filter to evaluate a small unsecured business loan application. A high score need not automatically mean the loan will be approved but it pushes the lenders to get an initial comfort factor.

• Better Deal:

A high business credit score implies the historical behaviour indicates a reasonable assurance of repayment of the loan on time. As a result, lenders see such borrowers as a good client and would offer better interest rates, flexibility in repayment structure and the total amount. In contrast, if the score is low a business loan may not be sanctioned at all. Even if a loan is sanctioned, it could be for a smaller amount, or carry strict covenants and a higher interest rate to cover the risk.

• Skip The Collateral:

If a business has a good credit score, it allows the enterprise to consider unsecured loans as an option. In the absence of a good business credit score, the entity may be forced to consider only a secured or collateral-backed loan. As a result, the business owner need not put up his or her own valuable asset as a collateral or the business itself need not mortgage the office premises or machinery to secure a loan.

• Reputation:

A few suppliers or vendors and other businesses looking to partner with an enterprise may do their own diligence whether to deal with a firm. In such cases, they may even independently like to check the credit report or rank of the subject company. A good business credit score could come in handy in sealing a deal with them.

Conclusion

Businesses need to look at debt as a way to run their operations with working capital or for scaling. For small businesses, an unsecured loan comes in handy to meet both the requirements. But how do they stand with respect to their business credit score determines whether they can convince a lender to accept their loan application and if so at what terms.

A good business credit score enables one to access a business loan quickly, at low interest rates and with flexible repayment terms.

IIFL Finance offers instant business loans up to Rs 30 lakh for businesses that have been in operation for over six months with a simple online process at low interest rates. It also offers secured loans of up to Rs 10 crore.