Maintaining A Favourable Credit Score as an SME

With limited personnel and small investment figures, Small and Medium Enterprises (SMEs) make up a dynamic and vibrant sector of the Indian economy. Considered by many to be driving innovation and competition in several sectors, SMEs have seen considerable growth over the last few years. With less capital than most big organisations, numerous SME owners often find themselves at banks and Non-Banking Financial Companies (NBFCs) looking for monetary aid. To determine whether or not to sanction the loan request, the bank or NBFC will carefully consider the SMEs credit score.

Several factors are considered during the calculation of your business credit score. These include your payment history, credit utilisation ratio, length of credit history, company size, industry risk, and public records. A higher score indicates that a business is doing well, and businesses with higher scores have better chances of obtaining financing. Maintaining a high credit score isn't always easy, but it will definitely help your company in the long run.

Maintaining a Good Credit Score

As the owner of an SME, if you have ever been denied a loan, the most likely reason is that you have a low personal or business credit score. Having a high credit score is important, not just to help you get financing, but also in securing new clients. Unlike a personal credit score, which is completely private, your business credit report can be looked up by potential customers, partners, and even suppliers. When you own a business, your credit report isn't just about your financial stability; it's also about your credibility.

Here are a few things you can do to make sure you maintain a good credit score for your business:

1. Update Your Information Periodically: In India, there are a number of credit bureaus like CIBIL, Equifax and Experian that collect data and create business credit reports. Every bureau has a different method of calculating a credit score, and your Equifax report may be different from your Experian report. As you can't be sure as to which credit bureau your vendors, creditors or potential customers will check, it's a good idea to maintain a good record across all the bureaus. You can update information such as number of years in operation, number of employees, and your financial statements from time-to-time. The more complete and up-to-date your profile, the higher your credit score is likely to be.
2. Make Payments on Time or Early: Your history of making payments to creditors is something that all credit bureaus will take into consideration while calculating your credit report. For a good score, you should always pay your dues on time. If you can manage it, try and make your payments a little early. This will have a positive impact on your credit report.
3. Build Credit Over Time: The sooner you start establishing business credit, the better it is for you. The length of your credit history plays a major role in your overall business credit report, so the longer your credit history, the higher your credit score. To help build your credit, think about your credit utilisation ratio. Credit utilisation is another crucial factor that bureaus look at, so even though you might not need to, it's a good idea to use your credit cards and other lines of credit regularly, as long as you don't max them out.
4. Borrow Only From Lenders Who Report to Credit Bureaus: Your payment history is an important factor that could make or break your credit report. However, if you take a loan from a lender who does not report to a credit bureau, it won't have any kind of positive effect on your credit score whatsoever. If your main idea behind taking out a loan is to build your credit, then you need to ensure that your lender reports to a credit bureau before signing on the dotted line.
5. Maintain Clean Public Records: Along with your credit history, your business credit report will also have any public records that are filed in the name of your business. These records will include bankruptcies, liens and judgments. A court ruling against you in a debt collection lawsuit, known as a judgment will have a negative effect on your score. Any negative marks on your rating could haunt your business for a long time. A bankruptcy claim can negatively affect your Experian credit score for up to 10 years.

How to Right the Wrongs

We all know that defaulting on a loan is something that could cost you in the long run. If you do happen to default on a loan, it isn't the end of your business. While getting your credit score rating up might take a little time, here's a list of things you can do to get your finances back on track as soon as possible:

1. Negotiate with the Lender: If you've missed a payment because of a sudden credit crunch, you can try talking to your lender and reach a mutually agreeable arrangement. This could include lowering your payments in exchange for a higher rate of interest over a longer period of time, or even asking the lender to simply forgive a few late payments. Some lenders may be ready to compromise, while others may not be open to your suggestions. It's always a good idea to seek legal advice, or even have a lawyer present while discussing revised payment terms.
2. Assignments for the Benefit of Creditors: If the compromise talks don't bear fruit, you can also sign an "assignment for the benefit of creditors". Without having to sign for bankruptcy, this document allows you to make an agreement with your creditors, to offer some business assets to an impartial third-party. Once the third-party is mutually agreed upon, they are responsible for the liquidation of the business assets and the division of the funds received amongst the creditors.
3. Deeds in Lieu: Instead of selling off certain assets, when physical property is involved, you can deed whatever interest you have in the aforementioned property over to the lender. Generally, the lender will already have a deed of trust, or mortgage on the property. However, some laws allow borrowers to take back, or redeem the property once the outstanding loan is paid off, and many lenders may be hesitant to accept a deed in lieu agreement because of this.
4. Personal Guarantees: There is also a way you can skip the entire foreclosure process. You can ask a high-worth individual to personally guarantee your business loan for you. Creditors are generally happy with this arrangement, as it is easier for them to make demands on a guarantor with personal assets on the line than it is to foreclose on a business property that might not even be worth enough to cover the loan amount.

Getting your finances back on track is the first step towards building up your credit report. It may take some time to get your business a high credit score, but as long as you keep your finances in check, and avoid defaulting on a loan, or maxing out your lines of credit, your business credit rating is sure to increase steadily. Once you have a good credit score, you can easily maintain it, and get your company more credibility in the market.

India Infoline Finance Limited (IIFL) is an NBFC, and is a reputed name when it comes to financial solutions such as mortgage loans, gold loans, capital market finance, healthcare finance, and SME finance.

At IIFL, we help you meet long term and daily working capital needs of your business through our specialised SME loans. You can choose from a revolving line of credit or a term loan or a combination of both, through our customised loan solutions. All in all, an IIFL SME Loan will enable you to optimise your borrowing cost and ensure that you have timely access to funds.

click here to read why good CIBIL Score is esssential for availing home loans.