The biggest worry for all budding entrepreneurs hoping to establish a successful business is – getting approved for a timely business loan. Unless you’ve inherited a vast legacy from your parents or ancestors or started a business after saving years for it, you will need to borrow money at some point or another.
Taking a business loan is challenging and daunting, especially if you have never borrowed money from a bank/NBFC before. One of the deciding factors for a loan is a – high credit score.
Building and maintaining a high credit score and ensuring that your credit report is in order may not be at the top of your mind while starting a business. However, it’s a critical aspect of running a successful business. Ultimately, a good credit score and a strong credit report ensure timely access to the requisite business capital, helping your business flourish and grow.
If you think that your credit score could do with some improvement, don’t worry. Fortunately, building a solid credit score is easy, provided you implement the right strategies. In this post, we share the top ways entrepreneurs can improve their credit ratings and build a strong credit history.
#1: Pay your Bills on Time
Regularly paying all your bills – credit card payments, loan EMIs, utility bills etc., helps you build a strong credit history and improve your credit score over time. It shows the banker that you’re reliable and can be trusted to repay your loans on time.
The payment history is the single most crucial factor in your credit score and credit report. Even a slight delay or a single missed payment can impact your score. So, make sure to repay all bills on time every month.
#2: Keep Credit Utilization Low
The amount of credit you use is considered a predictor of how likely you are to default on future loans. It has a direct impact on your credit score. Credit utilisation is the ratio of credit used to the total available credit limit.
The golden rule of thumb is to keep the credit utilisation ratio as low as possible. Having a ratio of 30% to 10% is considered excellent, especially if you’re trying to build your score.
#3: Maintain the Right Balance of Credit Types
Apart from the two factors mentioned above, credit bureaus also look at the types of credit accounts you have on your portfolio. For example, having too many credit cards harms your credit score, especially if you’re consistently delaying credit card bill payments or using the balance from one card to settle another card bill and so on.
Try to maintain a mix of different types of credits: secured like home loans, car loans, bike loans and unsecured like personal loan, credit cards, etc.
#4: Avoid Multiple Credit Applications Simultaneously
Yes, we can understand that you’re desperate for a loan. So, you try to apply with multiple lenders, hoping that at least one goes through. This is a wrong move that can backfire.
Applying for a loan with multiple lenders simultaneously leads to several hard inquiries on your credit report within a short span. This indicates to lenders that you’re hungry for credit, which negatively impacts your credit score.
To avoid this scenario, apply only for loans that you have a higher chance of being approved for. Alternatively, you can use trusted loan aggregator portals like CreditMantri to scan and shortlist all the loans you’re eligible for. You can then apply only with the lender who offers you the best deal.
Similarly, avoid applying for multiple credit products like – business loans, personal loans, credit cards, etc. – at the same time.
#5: Delineate Personal and Business Expenses
As an entrepreneur, the lines between personal and business expenses often get blurred. However, it’s crucial that you separate your business accounts from your personal finances. For example, it may be tempting to write off a lunch meeting with a friend under your business accounts head. However, you must separate both so that you can keep track of your business and personal expenses separately.
Having a separate business credit card to handle business expenses is an excellent way to build your business credit score over time. Additionally, taking a line of credit for your business and repaying it consistently helps to boost your credit ratings and establish a long-term credit history for your company.
Don’t make the cardinal mistake of taking a business loan and using it to pay for personal expenses. In the unfortunate case that you’re unable to repay the loan, buy cvv online, it can severely impact your business rating and can even lead to bankruptcy.
#6: Track and Monitor your Credit Score and Credit Reports Regularly
It’s a good practice to check your business credit score regularly. This gives you a clear idea of how your efforts are helping to improve your score and what action needs to be taken to further improve or maintain it.
The same applies to your credit report. While credit bureaus are meticulous, they aren’t always perfect. Names may be misspelt; critical information may be missing, debts that you have finished may still appear as open and so on.
Checking your credit report once every 3 to 6 months ensures that it is up to date. Also, you can check if all the information on it is correct and helps you identify and report any frauds or mistakes.
You can quickly get your personal and business credit report directly from the authorised credit bureaus. Alternatively, you can also use trusted credit facilitators like CreditMantri to track and monitor your personal credit score for free. The site also offers other value-added services like CHR (Credit Health Report), CIS (Credit Information Services) and business credit ratings.
#7: Don’t Lose Focus of your Personal Credit Score
Another common mistake that most emerging entrepreneurs make is that they fail to track and monitor their personal credit score. They falsely assume that to get a business loan – it’s only your business credit score that matters. Wrong! As an entrepreneur, even when banks lend a business loan to your company, they want to confirm that you as the business owner will take responsibility for the loan. So, they also evaluate your personal credit score along with the credit score of the business.
The tips mentioned above work both for your personal and business credit score. So, start by checking your personal credit score and take it from there. Also, some people avoid opening a credit card to prevent debts. However, using a credit card judiciously by paying the bills on time, staying within the limit and maintaining a low credit utilisation ratio is a great way to build your personal credit score.
Key Takeaways: Improve your Credit Score for Entrepreneurs
Finally, Be Patient
Very often, we hear entrepreneurs ask, “How long will it take to improve my credit score?” Well, it depends on where your current score is. Financial experts state that it takes anywhere from three months to one year for your credit score to improve. So, don’t expect the numbers to rise overnight.
Instead, follow the seven strategies listed here and build a strong credit score and history over time.
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Entrepreneurs can build their personal and business credit score by following these strategies: Pay bills on time; Limit credit utilisation; Track credit score and credit report regularly.
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