Every business requires a sufficient amount of working capital- be it to keep the daily operations running smoothly, implement new strategies and business models or more commonly, to start a new business or scale an existing business. However, not every owner business has the funds required for handling these tasks without disrupting the daily workflow. As a result, more and more businesses owners are opting for a business loan to ensure smooth operations and effortless expansion without any setbacks.
But before applying for a loan for business, loan seekers must understand that there are certain factors which can hinder their approval. To ensure business loan eligibility, they must have all the necessary documents and a secure business plan in place. Despite having the necessary details, however, the lack of a solid credit score can result in disapproval of loan.
Credit score plays an important role in determining business loan eligibility. And so, here we discuss, the components and importance of credit score and tips to increase credit score to ensure quick approvals on business loans.
What is Credit Score and Why is it Important?
Derived from credit rating agencies such as CIBIL, a credit score denotes the financial stability and health of an individual and his business. The business credit score and credit report reveal the creditworthiness of your business by monitoring your financial history and calculating your bankability to determine whether you are capable of repaying the business loan. It takes into account your current debt obligations, how you used these debts, whether or not you repaid your debts on time in the past thereby revealing loan repaying capabilities.
Credit scores are of two types- business and personal. And while a business loan usually only requires a solid business credit score, certain lenders may even weigh in your personal score to evaluate your financial capabilities and approve or disapprove your application for a loan for business. Moreover, if hold a credit score solid enough to get an approval, it can also determine the rate of interest which is charged upon your business loan.
Components of Credit Score
In this section, we shall discuss the components of a credit score to help you understand why it holds so much power in determining your chances for approval.
- Payment history related to business credit cards and past or current business loans.
- Credit relationship with current and past suppliers.
- Details of all credit availed by the business entity in the past.
- Miscellaneous details such as industry trends related to a business, nature of the business, etc.
How to Improve a Credit Score
Whether your credit score has dropped or if you’re trying to build a good score, it is important to be regular with your bill payments. Always keep debt levels low and pay your EMIs on time. Ensure that there are no errors in your credit report and never use your personal finances for business purposes. Stay cautious while using credit and maintain a credit utilization ratio of 25%. Acquire limited debts, pay your creditors on time and make limited applications for new credit.
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