Credit History – What Works and What Doesn’t for Business Loans

May 6, 2020

Many a time, business owners encounter constraints based on credit score and credit history while applying for loans. If you are familiar with credit evaluation companies like CIBIL, Equifax, Experian, Highmark, you might already know about credit scores. Going a step further, lending companies also assess businesses based on their credit history. In simpler terms, a credit history of any company records the historical data of credit behavior of any business or person.

Brief Overview of Credit History

Every credit evaluation company has its own ways of assessing credit history. Additionally, NBFCs can also use their proprietary algorithms to analyze transactions recorded in your bank statements. So, it is very important for you to understand how standard credit reports present information. This will help you maintain a great credit profile and help in getting speedier loan approvals.

If you want to avail a business loan soon, you should check your company credit history and score every three to six months. This will help you understand the impact of financial actions on credit reports which might otherwise be overlooked.

Additionally, you should take special note of the following to avoid loan application rejection – 1. Avoid co-signing somebody else’s loan application. Being a standing guarantor on a defaulted loan can terminate your own loan application 2. Try to avoid getting derogatory remarks on your credit report. Despite having a good credit score, this can adversely affect your loan proposal 3. File your income tax returns in a timely manner and make sure there are no lapses for at least two years. 4. Make sure you have appropriate paperwork. This includes, but is not limited to, written business plans, financial projections, business credit reports and bank statements. This significantly boosts the likelihood of your loan approval.

CIBIL Credit Report and Credit History

CIBIL (Credit Information Bureau of India Limited) is perhaps the most widely known authority in India for credit reports. The CIBIL TransUnion score (CIBIL Score) is a three-digit number ranging from 300 to 900 that helps people or companies know how creditworthy they are. For limited (less than 6 months) or no credit behavior, the score can be within -1 to 5. This is not a bad thing. It just means you have a better chance of landing a higher score in CIBIL sooner, if you keep your finances in check. The higher the score, the better are the chances for you to get a loan approval. Standard lending institutions as well as contemporary NBFCs generally look for a score more than 720 for loan applications. You can expect positive response from lenders with a score of 700 or above. You can visit this link to request your CIBIL report.

The CIBIL Commercial Credit Information Report lists a very important ranking method. CIBIL MSME rank for a company can range from 1 to 10. The lower the number, the better. Companies which have outstanding loans of INR 10 lakhs to 10 crores are ranked here.

The report also lists summaries of credit profile and enquiries made by lenders. Any derogatory information like willful defaults, suits filed and the like are mentioned in a separate section. The cleaner this section is, the better. After these sections, the rest of the report deals with details of items mentioned in the summaries. For an in-depth understanding of a sample CIBIL report, please visit this link.

Experian Credit Report and Credit History

The company credit information report from Experian is much simpler to understand and has lesser details compared to CIBIL reports. It is also more cost-effective than CIBIL or Equifax. But you will have to wait for 15-20 days to receive your report. That is quite a long duration compared to 7 days (CIBIL). Experian scores range from -35 to 1005. The higher the score, the better. You can visit this link to request an Experian Credit report.

A typical Experian report starts off with the registered address of the business or person, PAN details, date of birth and a few other business/personal details. This is followed by details of all the loans or credit facilities availed by the person/business. At the end of the report, you can find the Experian Score. To know more about Experian credit reports, please visit this link.

You should keep in mind that these reports are updated based on the information provided by the lenders. If you find any information that is wrong or missing, you can always open file dispute claims to resolve them and get your scores updated. All credit reports normally maintain historical data till 6-7 years. However, if your business has been doing good for the past 2-3 years, that reflects good with lenders.

The following points are the ones that almost every lender will look for in a credit report and history – 1. Volume of transactions per month 2. Number of transactions per month 3. Payments made towards existing loans/credit cards 4. Payments made towards bills 5. Balance at the end of the month

Be sure to keep your business and personal finances separate, so the reports can reflect your business revenue very clearly.

Most banks and financial institutions are focussed on the recent transactions of the borrower. They may not give undue importance to a bad loan payment which happened ten years ago. If recent transactions are clean and timely, this can clearly work in your favour to get the loan.

To maximize your chances of getting a loan approved, you need to plan well in advance. You need to observe a good credit behavior. That includes paying your dues and installments on time, ensuring your business shows consistent profit. Your presence in the business also matters. Years of consistent business performance add up to a great bonus in landing a speedy loan approval. You can also look at fulfilment of collateral requirement and check IT returns.

Credit History – What Doesn’t Matter

No matter how good your credit score is, it will be difficult for lenders to entertain your loan application if – 1. The business transactions are few and far between 2. The amount of transactions is proportionately low to the number of transactions 3. Business is posting decrease in revenue for the past 1 year or more 4. The bank balance at the end of the month is consistently low 5. Too many delays occur on bill payments, loan EMIs or credit card payments

Credit History is Important

Just like knowing our history is an important part in our education, credit history is important to get your business moving ahead. If you check for your credit history or report, it doesn’t lower your credit score. Most lenders offering working capital loans will not be looking at historical data older than 2 years. That doesn’t mean you can afford to slip up and make careless decisions with your money. Every single rupee spent adds to your credit profile. If there is a lapse in paying your EMIs or bills, inform your bank or lender way ahead. A little bit of communication goes a long way in keeping your credit history shining bright and clean.

As a signing off, keep in mind that a business loan, just like any other loan, is a responsibility and a liability. Availing one at the proper time and repaying it on time will ensure that your next loans are available at much lower rates and in shorter time.

Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of DLAI and DLAI does not assume any responsibility or liability for the same.