Why having a good credit score is crucial for your business

Why having a good credit score is crucial for your business

29 March, 2023

Business expansion is integral to all small-scale enterprises. However, mere aspiration to grow and expand is not enough. These businesses require funds to grow, and their most accessible source of funds is banks and other financial institutions. To borrow, one of the most basic requirements is a good credit score. Having a good credit score enables the borrower (in this case, the business owner) to avail of business loans at competitive rates.

What is a credit score?

An individual’s credit score reflects their creditworthiness and is represented by a number between 300 and 850. Typically, a credit score above 700 is considered to be good from the perspective of both borrower and lender. It enables the borrower to avail a loan at competitive interest rates while the lender is assured of a lower default risk.

The credit score is calculated based on the borrower’s history of credit. The repayment history of other loans, settlement of credit card bills, the total level of debt, number of open accounts etc., are considered to ascertain the credit score. The credit score becomes a key metric to assess the probability of default risk by the borrower.

Factors determining the credit score

A credit score is calculated by taking these four critical factors into mind:

  • Payment history (weightage 30%): This is considered to be the most critical factor that affects the credit score either positively or negatively. Prompt payment of outstanding credit card bills and loan EMIs can boost your score. Instances of delayed payments or default in payments are likely to affect the credit score negatively.

  • Credit utilisation ratio (weightage 25%): This refers to the credit used by an individual as a percentage of the overall credit limit available to them. If they use a large proportion of the available limit, it reflects negatively. Experts believe that, ideally, one should not exceed 30% of their total credit limit.

  • Credit mix (weightage 25%): This is another critical factor that affects your credit score. Secured loans with shorter duration are considered to impact the credit score positively, while unsecured loans and longer duration loans have a negative impact.

  • Other factors (weightage 20%): Hard inquiries, where lenders pull out credit reports from the credit bureau, are not good. If there are multiple inquiries, it is likely to negatively impact your credit score.

Benefits of having a good credit score

Having a good credit score has many advantages, especially from the perspective of availing of business loans. Here are the main benefits:

  • Quick approvals: A high credit score enables quick loan approvals, and maintaining a score of 700+ ensures eligibility for business loans. A higher score will enable one to borrow at competitive interest rates. Loans usually involve detailed documentation and rigorous investigation. But a good credit score expedites the process.

  • Investor faith: An SME owner having a high credit score is likely to attract more investors, as it reinforces the faith of investors in the company. Having investors of repute on board can facilitate fast-paced growth for small businesses.

  • Better interest rates: As indicated earlier, a good credit score enables one to avail of loans at competitive rates and terms. Although a credit score of 700 does make you eligible, a score between 750 and 900 shows exemplary credit history. The higher the score, the easier it is to get a loan.

  • Ready cash flow: A healthy credit score ensures that business expansion and growth can be conducted seamlessly without having problems with cash flow. It is much easier for such companies to find investors willing to back them.

A healthy credit score is essential not just for individuals; even SME owners who are often on the lookout for business loans and other sources of funding can greatly benefit from it.

If your credit score is excellent, you can avail of a Business Loan with HDFC Bank for upto ₹40 lakh without any collateral or guarantor. You can also get your existing loan transferred to HDFC Bank at lower EMIs and attractive interest rates.

Looking to apply for Business Loan? Click here.

To learn more about Business Loans for MSME and Start-up Businesses, click here.

​​​​​​​*HDFC Bank recognises the challenges entrepreneurs face while acquiring capital. Thus, HDFC Bank has created MyBusiness, a one-stop solution that gives you easy access to loans, digital solutions and provides you with the essential knowledge you need to run your business. With HDFC Bank MyBusiness, you can scale up, expand your operations, and nurture your business.