If you are a financially conscientious individual, you already know that your credit score is very important in this day and age. Credit is omnipresent and you are probably using credit to buy everything from groceries to gadgets! It is a perfectly fine practice so long as your credit score is in order as it is considered as a barometer of your financial health and is referred to by lenders when you apply for a fresh line of credit.
Therefore in order to be able to borrow money whenever you need it, you need to keep your score healthy. And while as an individual you need to keep your score healthy (over 750 and above out of 900) you need to be doubly as careful if you are an entrepreneur. In fact, here a few credit mistakes you should avoid if you have just begun your start up.
The cardinal mistake that most entrepreneurs tend to make is that they use their personal cards or tend to take a personal loan for business purposes. While there is nothing wrong or illegal about it, especially if you are bootstrapping your business, it can get murky if you are unable to make repayments on time and may even dent your score over the long term.
You begin thinking it's a one man show and based on the basis of your good credit record so far (since you have made a constant attempt to improve CIBIL score and maintained a good credit track record), you will be able to get a quick loan or make some infrastructure investment with your credit card. But if things do not go as planned as far as your business is concerned, you may end up in a debt trap. What's more, your chances to access personal credit reduces and you may not be able to use your credit card or take a loan for personal use if you need it.
As an entrepreneur, you must understand that your business cannot flourish when tied to your personal debt. That way, if your business does not generate returns as you expect it to, you may end up in the loan defaulter list. What you need to have is, therefore, a company credit profile. When you register your enterprise as a private limited company, you can apply for a business loan. With many Government related initiatives to aid small business owners, it has become easier to access business loans from traditional and non-traditional financial institutions.
When you access business loans and have credit exposure of more than Rs 10 lakhs, your financial information is recorded in a company credit report (CCR) and you are assigned a "CIBIL rank" between 1-10 (1 being the highest). The higher you CIBIL rank the better your chances are to secure credit, as lenders tend to rely heavily on the CCR to assess the credit worthiness of your organisation. Thus, just as it is important to improve CIBIL score on a personal level, it is important to improve your CIBIL rank for the sake of improving the creditworthiness of your enterprise.
Maintain a good repayment track record- Needless to say, it begins with timely repayment of credit. Whether you are an individual or a company, the credit rating of your company can be improved by making timely credit repayments.
Maintain a low credit utilisation ratio- Just like it is with an individual, a higher rate of credit utilisation is indicative of the fact that a company is credit hungry and can bring down the credit rating. Too many credit lines may lead to the inability to make repayments. As a result, your company may land you up in the loan defaulter list eventually.
Length of credit - Companies with a longer track record of serving credit have a better ranking than that of start-ups. These companies are thus likely to get faster access to credit at better rates of interest. Therefore to improve your credit ranking, be patient in building the length of credit. Repaying credit diligently over a period of time will impact your CIBIL rank positively.