A business’s credit history is a summary of its financial history, including its debts, payments, and credit utilisation. The key factors that determine business credit history are:
- Repayment of business loans and other debts.
- Payment of business credit card dues and company bills.
- Liabilities, liens, or bankruptcies, if any.
Credit history is important because it determines a business’s credit score, directly indicating its creditworthiness. A good credit history translates into a higher business credit score.
Good business credit history vs bad business credit history vs no business credit history
On a scale of 300 to 900, most lenders consider a credit score of 660 or more as a good credit score, as it indicates high loan repayment capacity and minimal chances of default.
A bad credit history implies a credit score ranging from 300 – 500. Businesses that default on payments have substantial outstanding debt and demonstrate excessive credit utilisation typically have a bad credit history.
Small businesses and startups usually have no credit history. They must establish a credit history through measures such as – applying for a business credit card or small, easily repayable business loans. In time, these practices also help to improve the entity’s creditworthiness.
Is credit history important in business loan approvals?
Business credit history is crucial in getting loan approvals.
When you apply for a business loan, the lender or bank analyses your business credit history and past repayment behaviour to judge whether you are likely to repay the loan on time. The loan eligibility and terms are based on your business credit score, credit reports, and payment history.
Here is how a good business credit history impacts loan approval:
· Securing larger loan amounts
A good credit history indicates that you repay your debts on time, handle funds responsibly, and honour legalities and compliance regulations. This makes you eligible for higher loan amounts.
· Accelerating the approval process
Speed is crucial when you apply for a business loan to tackle cash flow problems. Your credit history is important in accessing substantial loan amounts and speeding up the approval process. A high credit score will get your loan approved quickly and easily.
· Obtaining lower interest rates and longer tenures
Good credit history is important in demonstrating that lending to your business is not a risk. Lenders, therefore, will not feel compelled to hike their interest rates for added security, enabling you to avail of the lowest possible interest rates and longer tenures.
· Fostering growth
Substantial loan amounts, quick disbursal, optimal interest rates, and flexible tenures mean smooth operations and continuous growth for your business.
Additionally, business history could help in obtaining better business insurance rates. Insurance companies may use a business owner’s credit score as a factor in determining their premiums or whether to issue coverage at all. This is because a credit score is often viewed as an indicator of financial responsibility and stability.
While business history is an important factor that can influence the rates of business insurance policies, its ultimate impact is entirely at the sole discretion of the insurance companies.
For example, if a business owner has a low credit score, an insurance company may consider them to be a higher risk and charge higher premiums or decline coverage altogether. On the other hand, if a business owner has a high credit score, an insurance company may view them as a lower risk and offer lower premiums or more coverage options.
Will I get a business loan with a bad credit history or no credit history?
Although it is possible to acquire business loans with a bad credit history or no credit history, it is difficult to access more significant amounts, and favourable repayment terms as lenders seek to minimise their financial risk.
However, there are a few ways to garner funds despite a bad or no credit history:
- If you are a small business with no credit history, avail of small loans that are easier to repay. This keeps you from infringing on your personal credit and helps you build a business credit history.
- Small businesses with a bad credit history may apply for a bank loan at higher interest rates or against an existing fixed deposit.
- NFBCs can provide business loans with bad or no credit history. They disburse substantial loan amounts despite low credit scores, although at very high-interest rates.
- You can obtain a business credit card for an additional line of credit. However, you must limit credit utilisation and pay your dues on time to build a good business credit history.
- Most importantly, work towards establishing a good credit history with the following best practices:
- Keep your business credit distinct from your personal credit. Using personal finances to pay for significant business expenses increases your credit utilisation ratio, while negatively impacting your business credit history.
- Limit your credit utilisation ratio to 25%.
- Pay off old debts and limit incurring new ones.
- Use your funds responsibly and pay creditors on time.
- Monitor your business credit history through regular credit score checks.
How can CRIF help?
Looking to stay ahead of the curve with your business credit score and reporting in India? Look no further than CRIF High Mark, the leading credit bureau in India, offering cutting-edge solutions for credit scoring, reporting, and analytics. Take the first step towards maximising your business’s financial potential, get your credit report and learn more about CRIF High Mark’s credit solutions today.