The Fundamentals Of Your Business Credit Score
If you think personal and business credit score is the same – spoiler alert! It is not. Business, being a different entity, has a separate credit rating. The personal credit score may also affect the business credit score. Not knowing the difference can likely affect your eligibility for business loans.
Let us have a look at the basics of business credit score.
What Is A Business Credit Score?
It determines the creditworthiness of a business. Thus, a business credit score gives an estimate of the repayment capability of an organization. A third party evaluator derives the score. It gives an insight into the debt management ability of a business. Various parameters are used to calculate the rating. They are financial, non-financial, credit history, and business and market potential.
Who Derives the Score?
India has many credit rating agencies. Some of the major agencies operating in this industry are CRISIL, ICRA, CARE, ONICRA, FITCH & SMERA. CRISIL is the market leader with 60% market share. SMERA is India’s first agency specializing in Micro, Small and Medium Enterprises (MSME) sector rating.
How is the credit rating derived?
Unlike personal credit score, business ratings are not available readily. You have to request vendors/agencies to provide the score. You are also required to furnish them with the relevant financial documents for the same. The process involved is:
- MSME requests the agency for credit rating
- MSME submits financial and managerial information to the agency along with a duly filled questionnaire
- The agency visits the site/office and also meets the management
- Agency performs a detailed analysis and industry research and prepares a draft report
- The proposed rating is presented to the Rating Committee
- Agency informs the rating to MSME
- MSME can appeal to the Rating Committee if required
- The final rating is published
Why do you need business credit rating?
- Authenticity: Being evaluated by a third party, it builds authenticity of your firm’s credit worthiness without any bias.
- Access: All the lenders – banks and NBFCs – check the credit score before lending. A readily available credit rating ensures easy and quick access to business finance.
- Cheaper loans: With a good business credit rating, you can avail business loans at cheaper interest rates. The collateral requirement also reduces.
- Builds trust: Having a business credit rating creates a strong image among stakeholders – customers, and suppliers.
- Competitive study: The rating helps to judge your financial position compared to the competitors.
When does personal score affect business loan?
Ideally, business loans do not have any impact on your personal finances. However, in certain cases, your personal credit score can affect your eligibility for a business loan. Here’s how:
- A sole proprietorship firm: Because you are the only owner of the business, your credit history impacts your business finances.
- First-time applicant: The personal credit score is also checked for other business types, like private limited, if the business is new.
- Few financial transactions: Lenders and agencies cannot decide credit worthiness of your business due to insufficient transactions.
- Delayed and missed loan payments: This is a red mark in your credit history. It can restrict you from getting a business loan.
- Past record of bankruptcy: It stays in your credit history for 10 years. Lenders are reluctant to loan money to a business backed by such individuals.
Ensure that you maintain a good business credit rating by repaying existing loans on time. Also, try to keep business and personal transactions separate. A healthy credit score is vital for you to avail business finance easily.