Micro, Small, and Medium Enterprises (MSMEs) play a pivotal role in driving economic growth and generating employment possibilities. These businesses often are searching for monetary assistance in the form of loans to extend their operations, put money into infrastructure, and fulfil working capital requirements. However, before approving a mortgage, banks and monetary institutions assess the creditworthiness of MSMEs, with a sizable attention on the credit score.
Let’s find out how to improve your business credit score for MSME loan approval and the factors affecting the credit score for easy loan accessibility.
Significance of Credit Scores for MSME Loans
A credit score is a numerical representation of an individual’s or commercial enterprise’s creditworthiness, playing a vital component in MSME loan eligibility. It’s a three-digit number that condenses a person’s or enterprise’s credit history primarily based on different factors, consisting of repayment track reports, credit utilisation, mortgage defaults, and credit enquiries.
In India, credit ratings for corporations are provided by credit rating agencies like CRISIL, ICRA, and CARE, while personal credit ratings are furnished through credit bureaus like CIBIL, Experian, Equifax, and Highmark.
What is a Credit Score?
Credit scores serve as a vital parameter for banks and financial establishments to assess eligibility for MSME loans. They provide a rapid evaluation of the borrower’s creditworthiness and their chance of making well-timed payments. A higher credit score shows lower credit risk, making the borrower more appealing to creditors. Conversely, a lower credit rating may also lead to loan rejections or higher interest rates, suggesting a greater risk of default. Usually, a credit score above 650 is considered good.
Factors that Affect Credit Scores
Multiple elements impact an MSME’s credit score. Key considerations include:
- Repayment History: Timely loan and credit card bill payments are crucial. Delays or defaults can harm your credit score.
- Credit Utilisation Ratio: High credit utilisation negatively affects your score, indicating heavy reliance on credit.
- Credit Mix: Diverse credit types, both secured and unsecured, can boost your score.
- Length of Credit History: Longer histories enhance your creditworthiness. Maintain old credit accounts.
- Credit Enquiries: Excessive enquiries or loan applications in a short time may lower your score.
Why a Strong Credit Score Matters for MSMEs
Strong creditworthiness is essential for business success. Whether you’re starting a new venture or expanding an existing one, lenders consider personal credit scores and business credit rankings. A positive credit profile ensures quicker approvals, larger loans, and favourable interest rates.
Business credit reports, such as those from CIBIL and CRISIL, guide lenders in assessing your financial health. Factors like outstanding loans and repayment history influence credit scores. Timely loan acquisition is crucial, and a higher credit score improves loan terms.
How to Improve Your Business Credit Score For MSME Loan Approval
Follow these steps to improve your credit score ratings:
- Maintain Manageable Debt Levels
Outstanding debt, including credit card balances, term loans, and other credit lines, appears as liabilities on your credit report. Accumulating excessive loans negatively impacts your business credit score, causing lenders to hesitate when sanctioning loans. Repaying older loans swiftly and keeping debt levels in check can improve your credit score and make short-term business loans more accessible.
- Manage Credit Utilisation
The credit utilisation ratio, or the ratio of your current debt to your credit limit, is a critical factor in determining your credit score. Many credit bureaus advise keeping this ratio below 30%. A higher ratio could indicate difficulty in managing finances. To boost your credit score, strive to repay the borrowed amount before making additional withdrawals.
- Build a Strong Credit History
Credit history significantly influences your credit score. An existing credit account with a successful repayment record reflects business stability and trustworthiness. The older your credit account, the more impact it has on your credit score, especially if it boasts a long-term clean credit history. Additionally, applying for the same loan from multiple lenders can lower your credit score, so limit applications to a select few lenders with high approval probability.
- Regularly Monitor Your Credit Report
Frequent tracking of your credit record assists in more than one way. It can help rectify factual inaccuracies, discover uncommon or fraudulent transactions, flag changes in credit rating, and track credit usage. This proactive approach allows you to cope with financial issues right away and maintain a healthy credit score profile.
- Register Your Business
Ensure that your enterprise is registered as a separate entity under the Companies Act before applying for a loan. This establishes your business as a distinct entity with important licences and a separate identification from the owner. Registering your commercial enterprise can facilitate the opening of business accounts or obtaining business credit cards, similarly enhancing your credit report.
In the end, knowing how to improve your business credit score for MSME loan approval is a fundamental step for MSMEs in search of favourable terms from lenders. By coping with outstanding debt, optimising credit usage, building robust credit records, regularly tracking your credit score file, and ensuring proper business registration, MSMEs can make their creditworthiness stronger and gain access to the monetary resources they require to realise their business goals.
A sturdy credit score not only benefits individual businesses but also contributes to the overall growth and sustainability of the MSME sector, fostering economic development and employment opportunities.