As an entrepreneur, it is crucial to understand the importance of a good business credit score. This is moreover necessary if you are starting a new business and need a loan, and do not have much cash flow to fund the company’s monetary needs. The fund could be required to handle expenses related to inventories, equipment, employees’ wages, marketing and sales activities. Now to obtain finance for these expenses, you need to meet up to the financer’s expectation regarding company credit score, which is usually reviewed before taking a lending decision.
It is imperative to maintain a good credit score as it speaks well about your company’s creditworthiness. Companies with a low credit score may also qualify for a loan, but it shall come with unfavourable terms such as high-interest rates, longer tenure, and not much flexibility in terms. This can hurt your company’s finances, as the borrowing will be quite expensive. Rather, if your company has an excellent score, you will have more power to negotiate for the most ideal offer.
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Understanding the Credit Ratings by Different Credit Bureaus
Before knowing the importance of a good business credit score, you must understand what qualifies as a good company score. The credit score usually ranges between 0 and 100, but credit ratings differ as per credit bureaus preparing the credit report. Each bureau has its own scoring model, and below we have reviewed the most common bureaus involved in the process.
- TransUnion CIBIL: TransUnion CIBIL Limited is the first credit information company in India. It is also referred to as a Credit Bureau. To calculate the CIBIL score of a company, its credit behaviour is taken into account. The score ranges between 300 and 900 when calculating a personal credit score. A score closer to 900 is considered good for a loan application to get approved. However, the CIBIL rating for company credit reports works differently. The rank is provided on a scale of 1 to 10. Rank 1 is considered the best to take a business loan. But, this rank is only provided to companies with credit exposure of between Rs. 10 lakhs and Rs. 50 crores. The CIBIL rank presents a firm’s ability to repay a loan.
- Equifax: This credit rating bureau assigns three scores to businesses in their credit reports. The traditional credit risk score ranges between 101 and 992. It provides a brief of the company’s credit history. A score over 556 is considered good. A score of 0 indicates bankruptcy. The business failure score rates companies based on the probability of the business going under. The score ranges between 1,000 and 1,610. The payment index score ranges between 1 and 100 (1 being the worst on the scale, and 100 being the best). The score is a reflection of the company’s payment history. In case the company has paid bills on time, the score will be around and closer to 100, which is considered as good.
- Experian: To be accounted as having a good score per the Experian, the score must range between 76 and 100, as this is considered a low credit risk. On the other hand, if the score falls between 1 and 10, then it is considered a poor and high-risk score. Just in case you have a high-risk score, then you must work on improving the score in all the ways possible.
Benefits of Having a Good Company Credit Score
Below-mentioned is the importance of a good business credit score:
- Easier to be Eligible for a Loan
One of the benefits of having an acceptable score is that it gets easier to qualify for a company loan. Banks are eager to lend money to companies with excellent scores and clean repayment records, as they can trust you with making payments on time. Even if you are low on collateral, a good score will cover this. But a poor score can be detrimental, as it makes the lender cautious and hesitant in trusting you with funds, due to too many defaults on payments in the past.
- Negotiate for a Better Loan Amount, Rate, and Tenure
Once you qualify for the loan, the bank will offer you more favourable loan terms due to a good score. Since you will have proven creditworthiness, you can negotiate for the lowest interest rate, repayment flexibility, larger loan amount, and tenure of your choice. Moreover, if you are an existing customer, then you can get much better terms than that offered to regular customers. Favourable terms can greatly reduce the total cost of the loan, which in turn can help manage your finances better. You can repay in comfort, and save on interest payout by choosing shorter tenures.
- Does Not Disturb Personal Finances
If you have a decent company score, the lender will focus more on your business finances than personal finances. Thus, the collateral if any, you submit to the bank will be that related to the company, and not personal assets. Thus, you can keep your personal and business finances separate. Moreover, company debts and payments will be reported in company credit reports, than on personal credit reports, saving your personal score rating from getting affected by any financial hurdles the company may face.
- Suppliers Will Trust You More Than Before
A good credit score will help you get business loans quickly from the lender, but it will also allow suppliers and business partners to trust you more than before. Thus, when you deal with them next, they can offer you flexibility with payments on products and services. The suppliers may even trust you in case there is a delay in payment due to a financial woe. Suppliers may be fine with the purchase of inventory and equipment on credit, thus, you may not have to seek a traditional loan at all.
- Get Help for Business Expansion
Even if your company can fulfil its financial needs without a loan, someday down the line, it may require credit for business expansion. The expansion can be in terms of inventory, new employees, opening the business in a new location, a new line of products, the inclusion of advanced technology and equipment, etc. In this case, you can either choose a loan from a bank or approach sponsors and investors. An excellent business credit score will win the trust of investors, and they could be keen on investing and helping you with business expansion.
It is important to have a good business credit score for more than one reason. You can ensure an excellent company score by paying bills on time, reducing existing debt loans by paying the dues, keeping a check on the company credit rating time-to-time, and paying the taxes on time. Also, make sure the company is out of any legal trouble. If the company is going through a bad economic phase, you may want to wait before applying for a loan. As and when the company stabilizes financially, you can then look for funds from banks, or can choose alternate lenders in times of crisis.