5 mistakes that affect your company’s creditworthiness – Forbes Advisor INDIA
For new business owners looking to start their business or for a medium, small and micro enterprise (MSME) looking to explore new business opportunities to scale, it is necessary to know that strong credit is essential to obtain credit from formal lenders in India To take aim to achieve your business goals.
Here’s what you should know about the most common mistakes an MSME should avoid in order to remain creditworthy and avail business credit.
What is a Business Credit Score?
Your company’s credit score is calculated based on your credit history over the past 36 months. If you have not taken out a loan during this time, the Schufa cannot provide any creditworthiness information due to missing data.
The credit history and the personal creditworthiness of the owner, both in a partnership and in a sole proprietorship, count in the creditworthiness check.
Therefore, it is best that the company takes out a loan or the owner has credit card fees and they are paid back on time so that you have a good score when you need to decide on a loan.
Whether it’s investing in new equipment, expanding the business, or repaying vendor loans, every business owner may need to borrow at critical points in their business lifecycle. However, if your credit rating is low, many banks and credit institutions will not approve your business loan application.
Your credit rating would also affect the interest rate and structure of the loan you receive from non-bank financial corporations (NBFCs). Therefore, it is imperative to understand what mistakes could be affecting your company’s creditworthiness.
Mistakes to avoid for good credit
High intensity of credit building
Credit scores are affected when a business owner borrows too much money in a short period of time. This is taken by lenders as a sign that the customer is hungry for credit. Taking out too many unsecured loans can give lenders red flags, so it is necessary for business owners to use a mix of unsecured and secured loans.
Guarantee for a third-party loan
If a business owner sponsors a loan taken out by a third party and that third party defaults, the business owner/guarantor’s creditworthiness could be adversely affected even though they do not pay that loan directly.
By acting as guarantor, you undertake to pay back the loan. In the first place, avoid giving such guarantees. If you have to, you should be very careful at the time of giving the guarantee as someone else’s behavior could affect your score. And when you’ve done that, nudge the person to meet the repayment deadlines.
No credit report monitoring and updating
Another common mistake people make is ignoring disputed amounts on the credit report. For example, if no action is taken on false charges, the amount would accumulate and attract interest. This would then add up to a large amount and be reflected in your outstanding credit. Do not ignore any disputed amount and keep pursuing it until it is completely resolved.
A business owner must also monitor their 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.
When there are irregularities that may be reflected in the credit score, it is even more important to raise the dispute in a timely manner, as improving a low score takes time. Some examples of such irregularities are that a loan may be misattributed to the company that did not borrow the company, or that a loan that has been repaid in full may not be reported as “closed” by the lender.
Applying for loans from multiple lenders
When applying for a business loan, applying to too many lenders at once doesn’t really 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 if you’re asking for it within a short period of time.
If you work with a direct sales agent or a referral agent, communicate clearly with them when submitting your loan application and make sure they only send your loan application to a certain number of lenders. Watch out for too many loan requests; Every request for your credit report will be noted and too many of them will affect your credit score.
restructuring of a loan
When companies choose to restructure their loans, it is also reported as “restructured” on their credit reports. Banks and NBFCs are cautious about lending to such MSMEs. Any easing or waiver of credit conditions sets off alarm signals from lenders that the MSME is unable to repay.
A good credit report, based on a company’s timely repayment and responsible financial behavior, shows lenders that the company is a creditworthy borrower. Lenders provide such customers with pre-approved credit and higher credit volume at that, no questions asked. The credit process becomes smoother. Is there a downside, you may ask? no way. So, follow these tips and strengthen your business credit score before you take out your next loan.