5 Benefits of Having a Good Credit Score

5 Benefits of Having a Good Credit Score

So, you are planning to open up your own small business. It is likely that you have heard about Credit Score while discussing your venture with your friends and peers, or that you have read about it while researching on how to set up a small business. At the time, you may have paid little attention to it, or simply ignored it as just another obscure technicality. However, you may soon find out that it is much more important and relevant for your business establishment than you initially thought.

A credit score is a numerical value that is calculated based on the analysis of a person’s credit history, which includes that person’s records of loans borrowed and their repayment status, and punctuality of bill payments. In short, it assesses a person’s ability to repay a loan on time. Credit Information Companies, such as CIBIL, maintain credit scores of individuals, which are used by banks and lenders while assessing the eligibility of a person for a loan.

For someone looking to start a business, one has to take into consideration all the initial investment that is required, such as machinery, tools, advertising, employee remuneration, etc. It is rarely the case that you have funds to take care of all these expenses. So you turn to the banks to borrow a loan. This is where having a good credit score comes into the picture.

A less than decent credit score may secure you a loan all right, but the terms on which it is offered to you are significantly worse than those when it is being provided to you with a good credit. So keep reading to understand the benefits of a good credit score.

Understanding What is a Good Business Credit Score

Before getting to the benefits of a good credit score, it is essential to understand just what exactly is considered a good credit score. There are a total of four credit information companies in India. They are – 

CIBIL ( Credit Information Bureau of India Limited): Established in the year 2000, and is the oldest and most trusted credit bureau in India.

Equifax:  American credit bureau licensed to operate in India by the Reserve Bank of India.

Experian – Licensed to operate in India by the Reserve Bank of India in the year 2010.

CRIF High Mark – Licensed to operate in India by the Reserve Bank of India in the year 2010.

All the credit mentioned above bureaus assign a score between 300 and 900 to an individual or business, and a score above 700 is considered as a good credit score by all the credit bureaus.

Finally! On to the benefits of developing a good credit score.

Advantages of Having a Good Credit Score

Quick loan approvals – A good credit score implies that you are punctual when it comes to managing your payments and debts. This makes you an attractive prospect for the banks since they want to invest their money in individuals and businesses that are capable of repaying the loans on time. As a result, banks provide loans with minimal hassle and paperwork. 

Better negotiation of terms – If you know that you have a perfect credit score, it provides you with considerable negotiating power for the terms of granting the loan. You can use it to lower the interest rates for the loan, which can save a significant amount of money in repayments.

Secure approval from lenders/suppliers – While starting a business or even expanding an existing business, you may not just need a loan but also need to purchase equipment and supplies from suppliers on credit. Paying the full lump sum amount for supplies can seriously drain your funds, and hence, a good credit score will ensure that suppliers and lenders are cooperative in selling their products on credit payment. You may need renting a property for your business operations, in which case, the property owner factors in your credit score before letting you the property. Needless to say, a good credit score becomes crucial in the rapid approval of applications and ensuring the immediate commencement of business operations.

Personal finances are unaffected –Credit score exists separately for personal and business finances. A good business credit score ensures that all the business finance records remain only in the business credit report, and don’t influence your personal finance records, in case your business struggles to repay its debts due to business failure or substantial losses.

Vice versa, it is also essential to maintain an excellent personal credit score to avoid any impact on business credit score.

Access to cash for growth and expansion – If someone can take out the loan for their business expansion project, then it is going to allow that individual to grow his/her business larger than imagined. A mortgage is going to help get new equipment, facilities, or inventory that the expansion of the company might need.

How can you build up a good credit score?

Now that you have understood the importance of a good credit score, you want to know just how to build up and maintain a good credit score. It all comes down to careful monitoring of your business’s financial history and following ideal practices. Here’s how you can do it –

Pay your bills on time – Businesses incur significant amounts of money in bill payments, from electricity bills to water usage bills, and so on. Always pay these bills before the due date, and in-full. This reflects positively on your credit history, which leads to improvement in your credit score. Settle unpaid dues – Repay all the debts accrued on your credit cards. The longer they remain unpaid, the lower your credit score gets. It is advisable to use not more than two credit cards for your personal finances since it helps in better monitoring of your investments.

Review your credit report periodically – Get your credit report regularly to keep track of your credit score and identify the accounts which need better managing.

Hold on to your oldest credit card – Do not close your oldest credit card just because you don’t use it anymore. In fact, an old credit card with a history of well-managed finances provides much-needed stability to your credit history, which has a significant impact on achieving a high credit score.

Having a good credit score, personal as well as business, is vital in setting up a new business or expanding an established one. It enables you to have easy access to the resources needed to ensure sustained growth of your business and protects you from unforeseen financial circumstances adversely affecting your future possibilities.

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