How To Improve Your Credit Score For A Business Loan?

Whether you're an entrepreneur looking to expand your business or a small business owner in need of funds, having a good credit score plays a vital role in securing a business loan. Your credit score reflects your creditworthiness and determines whether lenders will approve your loan application. In this blog post, we will discuss the importance of credit scores, how they are calculated, and most importantly, the steps to improve credit score for a business loan.

Understanding the importance of credit score

To begin, let's understand what credit scores are and why they matter. Your credit score is a numerical representation of your creditworthiness based on factors such as payment history, debt utilisation, length of credit history, and more. It provides lenders with an overview of how responsible you are in managing credit.

Credit scores in India range from 300 to 900, with higher scores indicating better creditworthiness. Lenders typically prefer a credit score of 650 and above when considering business loan applications. So, it's important to maintain a good credit score to increase your chances of getting approved for a loan at favorable terms.

How to improve credit score: A few important steps

Now that we understand the significance of credit scores, let's dive into practical steps you can take to improve your score:

Never miss any payments

How to improve credit scores? Paying your bills on time is crucial for maintaining a good credit score. Late payments can negatively impact both your personal and business credit scores. Pay your credit card bills, EMIs, and other payments promptly.

Keep your credit utilisation low 

Credit utilisation refers to the percentage of your available credit that you are currently using. Always keep your credit utilisation below 30% to show responsible credit management. For example, if you have a credit limit of ₹1 lakh, try not to exceed a balance of ₹30,000.

Borrow from a mix of credit options

Having a diverse range of credit accounts can positively impact your credit score. Lenders look for a mix of revolving credit (e.g., business credit cards) and instalment credit (e.g., SME loans) to evaluate your ability to handle different types of debt. Maintaining a consistent payment history across various types of credit shows your creditworthiness.

File GST and other taxes regularly

Lenders also consider timely filing of GST and other taxes when assessing your creditworthiness. Regularly filing your taxes helps lenders gather accurate data about your business's sales and revenues, making it easier for them to evaluate loan applications. Additionally, it ensures transparency in your financial transactions.

Limit hard inquiries

Hard inquiries occur when financial institutions or potential employers check your credit report. While occasional hard inquiries may not significantly impact your score, multiple inquiries within a short period can raise concerns among lenders. They may perceive this as an indication that you are facing financial difficulties. To minimise the impact on your score, avoid unnecessary hard inquiries.

Check your business's credit report

Regularly monitor your business's credit report for any errors or discrepancies. Even minor mistakes can affect your company's credit rating. By reviewing the report periodically, you can identify and rectify any inaccuracies promptly.

Conclusion

You now know how to improve your credit score by following the steps outlined in this guide. Always remember the importance of credit score. Make timely payments, keep your credit utilisation low, diversify your credit options, file taxes regularly, limit hard inquiries, and monitor your business's credit report.If you're looking for a trusted partner to guide you through the process of improving your credit score and obtaining a business loan, consider Mahindra Finance. Their expertise in rural and semi-urban finance combined with their customer-centric approach makes them an ideal choice for aspiring entrepreneurs and small business owners. With Mahindra Finance, you can access low credit business loans to achieve your financial goals.

FAQs

Q: How long does it take to improve my credit score?

A: Improving your credit score takes time and consistent effort. It depends on various factors such as payment history, credit utilisation, and length of credit history.

Q: Can I apply for a business loan with a low credit score?

A: While having a good credit score is preferred by lenders, it is still possible to apply for a business loan with a low credit score. However, you may face challenges such as higher business loan interest rates or stricter eligibility criteria.

Q: Can Mahindra Finance help me if I have a low credit score?

A: Yes, Mahindra Finance understands the challenges faced by entrepreneurs and small business owners with low credit scores. They offer low credit business loans tailored to specific needs and provide personalized assistance to help improve your creditworthiness.