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Maintaining a Credit Score for a SME/MSME

The reality is most people do not know what a credit score is. Let’s not get into individual/personal scores or SMEs. Both are sailing on the same boat. A credit score is like a birth certificate. You know you have one, you even know the importance, but have you seen it off late? We know you must have not unless you have to submit it as a proof for some activity.

A credit score is a 3-digit number ranging from 300-900, 900 being the obvious highest. When you apply for a loans or credit card, your credit score is checked by the lender in order to ensure that you have the ability to repay. A higher credit score makes you reliable in the eyes of the lender, making it easy for loan approvals. The Credit Reference Agency (CRA) generates this score/number to indicate how reliable you have been with the past payments. Maintaining a credit score is important on individual basis, but is to be done by SMEs also, so that it becomes easy for them to avail SME loan.

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We discussed about credit score and stated its importance in order to share information on the vitality of the subject.  An individual can easily work on improving his credit score as he’s aware of his financial story.

We would talk nothing like the appalling website popups which make you believe in them, there’s no magic potion to improve your credit rating overnight. It is a process and you can work towards improving your credit score gradually. So, it’s in your own interest that you maintain a good credit score to make it smooth and maybe less expensive to obtain small business loan whenever needed.

The SME sector in India is huge. 42.50 million, both registered and unregistered together is the number of SME businesses in India. Collectively, it comes up to a jaw-dropping 95% of the total industrial units in India. It employs a huge workforce and hence considered as the backbone on Indian economy. Most of these organisations face shortage of funds, and they seek monetary aid from financial institutions. These lenders, primarily consider their credit score to determine whether loan should be sanctioned or not, also to decide the offer to be made to applicants.

Following are some effective tips on how you can maintain a good credit score for your SME.

Pay all your dues on time:

You score is determined on the basis of your payment history. Credit bureaus check all your previously made payments to assess or give you a credit score. All your payments are to be paid before the due date, whether they’re credit card bills or loan EMIs. Dues paid before leave a positive impact on your score. Similarly, late or payments done after the due date leave a negative impact on your score. A default can ruin your credit score for a longer period of time & you can face a lot of trouble getting out of it. Even if you manage to get out, a default stays forever.

Your business information should be regularly updated:

We previously discussed on how important it is for a business owner to keep a check on the credit score. The credit bureaus can check any reports; one cannot track or be sure about any of them. Apart from this, as a business owner you also have to make sure that all your reports reflect the correct information of your business so that you get a good score during the assessment. Information such as bank statements, balance sheets, no. of years of operation, size of the company, etc. should be regularly updated as an up-to-date profile gets a higher score. There are multiple credit bureaus so it is suggested that you monitor your scores by different bureaus to take action in time.

Not all lender report to credit bureaus, partner with the ones who do:

All your efforts may be wasted if the payments you do on time aren’t reported to credit bureaus. This will not help you improve score. In order to make sure, lenders report to the credit bureaus, partner with the bureaus who do this activity. Before you enter into an agreement with your lender or creditor, make sure they report your payment history and habits to the credit bureaus.

Monitor credit utilization:

The utilization of the available credit also impacts the assessment of the credit score. Over utilization gives an impression that your business is facing trouble in profit-making. The higher the utilization of credit goes, the lower your score will go. Limiting credit applications can also help.

Personal credit matters too:

Business and personal credit is recommended to be kept separate, but repayments for both are to be kept clean. As the business is in its initial stage, the business has less or no credit history, in that case, loans or credit cards are sanctioned on your personal credit score.

Achieving a credit score will take time, you will have to work for it by keeping your finances under observation. Once you achieve a decent score, it is vital to maintain it as your future credibility is dependent on it. In the initial stage of maintaining a credit score for your business identity or on personal level, things may seem difficult. Don’t give up, go ahead with discipline. Achieving a high credit score is possible, with a strong credit score; you can make your business achieve heights.

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