Five Tips to Boost Credit Scores for your SME
The Indian economy has been interspersed with Small and Medium-sized Enterprises (SMEs) for ages. They have boosted the country’s socio-economic growth and have been able to maintain an average growth rate of about 10%.
SMEs are generally entrepreneurial with limited assets, finance, and employees. Most of the SMEs have been able to successfully reap the success of their effort continually with little financial support. And this economic thrust is provided by the banks and credit bureaus they seek. The chances of you getting sanction for these loans depend on this crucial question- “ How good is your credit score?”
What’s a good credit score?
Credit scores are three-digit number ranging between 300 and 900. It is a scale to measure how credit-worthy you or your business is in lending a loan. These scores are curated and uploaded by credit rating agencies, taking into consideration a compilation of essential factors. It is also a reflection of potential risks that financial institutions would be put through while giving out loans to its clients.
There are a few key factors in assessing your credit score for SME loan eligibility: previous credit history, write-offs, and defaulting of loans taken. The most common range of acceptable credit score for SME loans ranges from 700 to 900. 700 is a good credit score for SMEs but pushing it upward to the 900 marks can help you enjoy special privileges. These privileges include quicker approval for loans, reduced interest rates, longer loan repayment time, and bigger loans. It’s never too late to maintain or improve credit scores.
How do you boost your credit score?
SME loans might seem hard to get initially. You are more likely to get these if you have a business running for a minimum of 3 to 5 years and have a credit history as a reference for banks and other financial institutions. It is vital to have a credit line or loan because-‘Longer the credit history, higher the credit score’.
Here are five tips that should help you.
- Pay your dues in time.
SME loans might seem hard to get sanctioned because of the lower working capital compared to other big companies. Don’t worry. There is still a silver lining. SMEs with a minimum of 3 to 5 years running the company, can avail for bigger loans if they have a past credit history as a reference for financial institutions with which they can cross-check. Remember, the longer the credit history, the higher the credit score!
If you have a history of loans paid in time, you will be considered more credit-worthy by the credit bureaus and banks, therefore uplifting your credit score. Make sure you avail loans from creditors that report to credit bureaus. The more you keep your credit line transparent, the more credit-worthy you become to creditors.
If you are sure that you can’t pay your dues on time, try negotiating with your lender. Try your luck. There’s no harm in trying! If you get lucky, they might reconsider extending your payment time. This depends on your lender, though. You can request lower payments with extended window period for payment that will help you buy time and sort it out.
- Monitor credit usage
Be your boss first. Always keep in mind your financial boundaries. According to creditors, ending up with multiple loans to cover up a loan that is already due may reflect on the score and makes you more credit-hungry. This will lower your score significantly. Lower your usage if it is likely to surpass your financial limits. You wouldn’t want to shell in your bank money to run your business.
It also spares you from falling into debt or loan default lawsuit. Sort out your business credit usage wisely. Don’t spend your money on things you do necessarily require for your business as it can also cause wastage of money and space.
- Mix of credits
You need to have an assortment of loans to keep your credit score positive. Consider taking secured and unsecured loans for your safety. Secured loans include car loans, home equity loans, and mortgage. It involves collateral as part of the deal.
Whereas, unsecured loans like personal loans and credit cards do not require collateral. Too many unsecured loans make it less likely that creditors offer loans to you. This cannot be missed out, as we all know they have no assets to recover losses incurred in case you falter. Have a mix of both, to improve SME loan eligibility and improve your score.
• Personal guarantor
It is a wise strategy to keep a personal guarantor for your business. A personal guarantor will take responsibility for your debts in case of a mortgage you cannot cover-up. Creditors will be more than happy to accept guarantors as it is more beneficial to them than settling on foreclosure on a business property.
This will aid you in difficult situations and help your company push out through the financial meltdown.
• Regular update of the information
Consistently keeping a check on your credit scores and records of past credit lines is crucial to improve credit scores. You need to ensure that all this information is regularly updated in your credit bureaus to improve your credit scores and help you get loans sanctioned more easily.
You need to stay clear of any chances of bankruptcy or judgments that can plaque your credit score. Make sure you update details like the number of employees in your business, number of years operating the company, and proof of financial statements that can help to get your score steering forward.
This does not happen overnight. It will take a minimum of 4 months to more than a year for this transition. But planning and consistent effort can surely help you mitigate this situation. It is never too late. Focus on your cash flow management methods and allocate your goals with an intelligent mindset. Make use of these tips and do your part for a better future in your business.
