What is a Good Credit Score and How to Improve it?

When it comes to small businesses or MSMEs, there is nothing more important than having a high credit score. This is something that can easily help you secure a better business loan, with a more competitive interest rate.

It can also help you in acquiring more personalized business loans, which may be tailored to cater to your business needs.

Furthermore, it helps in developing and maintaining strong relationships based on trust, with your loan provider.

What is a Good Credit Score?

Most credit rating agencies rate a good score like 700 or more, on a range of 300-850. If you can go a step further, and achieve 800 plus on the same scale, then you may rest assured that you’ll be the cream of the cream.

While this may alarmingly sound like a GMAT test, you can be sure that developing and holding on to a good credit score is much harder than cracking the GMAT.

How to Improve a Good Credit Score?

First of all, it’s vital to understand that improving a stellar credit score takes time, dedication, and proper planning. You need to have a certain amount of foresight to be able to calculate which moves will be most beneficial for your score. For an MSME, this is crucial.

It would be best if you also planned methodically to find the best way to relieve debt. The truth is that different types of MSMEs will have different strategies to optimize their credit score. They’ll use their priorities and business goals to chart out a map for this.

Although there’s no sure fire or fool proof way of making sure you stay on the right side of rating agencies, there are a few good practices, as we talk about below. These can help you increase your reliability and trustworthiness in the eyes of the most corporate lenders.

1. Educate yourself about What Helps Or Hinders a Good Credit Score

This is very important, as unless and until you know precisely what will contribute to a good credit score, you’ll be shooting in the dark. Don’t assume that every little payment you make is automatically playing a part in your score. Big payments, like loan repayments, utilities, rent and mortgage, definitely do affect the score.

However, your day-to-day petty cash payments will probably not play a huge role in this, unless you’re a continuous defaulter. Don’t be afraid to sit down with your loan provider, and discuss the various loan and financing options that would work best for your business.

Choose a repayment plan that you can comfortably stick to, even if it means stretching it for a little longer. This is useful because if you choose a repayment plan that is too aggressive for your business, you risk defaulting on a few payments, and adversely affecting your credit score. Remember that as long as your payments are made on time, your score is continuously improving.

2. Limit your Debt

That being said, you must limit your debt as much as possible, even if you’re confident of being able to pay it all off on time. This is because, if your borrowings exceed more than 30% of your total credit limit, it adversely affects your credit score.

Keep in mind that banks reflect the ratio of your total borrowings to your credit limit on their statements so that any rating agency can very easily access it. This is known as credit utilization.

Needless to say, a high utilization rate, in this case, sends out the wrong signals, of a floundering business. Not only this, but the less debt you have, the faster and easier it will be to pay them off and invest the surplus back into the business.

As an MSME, you will have access to several subsidized and interest-free loans, both by the government and other corporate lenders. Please keep your eyes peeled for these and make smart use of them to minimize the interest paid and maximize your credit score.

3. Partner with Lenders who Report to Credit Bureaus

This is one of the most easily ignored points when it comes to building and maintaining a good credit score. Most businesses automatically assume that their loan agencies are reporting to a credit bureau.

However, this could not be further from the truth. A huge number of lenders don’t report to any credit rating bureau or agency, simply because it is not mandatory to do so. Hence, you need to make sure that you’re only dealing with a loan provider who does.

These are usually the more elite banks and financial institutions which do so to maintain their reputations in the debt market. This will be a considerable advantage, if you manage to keep a good credit score, through timely payments and a low credit utilization rate, as it will automatically get transferred to the related credit agency.

This will make it much easier for your business to secure future loans as well.

The Final Wrap Up

While the points above speak mostly about the importance of businesses maintaining a good credit score, it is equally vital to maintain a stellar personal credit score as well. This is because MSMEs usually don’t have a lot of experience or exposure to the market.

Hence, the partners’ or proprietor’s credit score often becomes the foundation for a business loan. If nothing else, it simply helps in reassuring the loan provider of your creditworthiness.

Many NBFCs enable you to establish your creditworthiness while helping you to grow and secure the financial support you need in your journey. They make sure to do all the legwork and market research to ensure that you get the best possible support if your business has real potential.

Just approach a financial institution which offers you a business loan at reasonable interest rates and apply for the loan. The lender or online financial institution will fill the gap of the financial crises that you face in your business.

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About Geet Sharma

My Name is Geet Sharma Financial Blogger & Founder of Paisabank.org. We are a personal finance blog dedicated to finance & financial planners. The main aim of this blog is to help people to informed about financial decisions.
View all posts by Geet Sharma →

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