How Building Credit History Can Smoothen Your Entrepreneurial Journey13 Mar 2019
In India, businesses have been carried down generations after generations, albeit adding new technologies to expand the horizon and improve them with time. Today, if you take a look around, you will witness a silent revolution gradually disrupting the Indian economy. It is helping it grow manifolds, and also providing employment opportunities, more than the biggest conglomerates in India.
Yes, we are talking about the Small and Medium Enterprises, commonly known as the SMEs. Many budding entrepreneurs, many having no family background in business, have taken it upon themselves to serve the market with products and services that were unheard of.
The SME sector in India with about 36 million units is expected to play a much more important role in the Indian economy that is expected to touch $5 trillion by 2025. However, many SMEs fail to make their mark and fail miserably due to a lack of investments. At a time when ground-breaking reforms are kicking in, it is essential to ensure that one’s credit history is intact to easily deal with the backbone of any business – finance.
What is credit history?
In a nutshell, your business’s credit history is its ability to pay back any loan (credit) that was ever taken. It is a detailed documentation of a business’s credit information, balances, bankruptcies, delinquent payments, as well as personal identifying information and inquiries.
The credit history assess a business’s financial capability and viability to honour financial obligations, while providing insights into its operational, sales and financial composition. By doing so, it assess the risk element of a business, highlighting the overall health and future of an enterprise.
Why building credit history is important for your entrepreneurial journey?
Today, investors, accelerators, mentors and incubators are available to handhold a business in an atmosphere that is rife with challenges. The government of India, comprehending the sector’s contribution towards GDP, innovation and employment numbers has launched various initiatives to further the cause of SMEs.
Even though a lot of SMEs are reluctant to grow, preferring to stay small to avoid taxation and regulatory related hurdles, at times like this, the most advisable way to take a business ahead is to validate a conducive credit history. Along with, maintaining a healthy credit history also assists in private equity and concessional funding, gaining cheaper and faster credit for your venture.
This risk evaluation also lends credibility to a venture within the lender fraternity and trading channels, opening the door for better business opportunities when dealing with corporates and MNCs, as well as makes a business more credible to get bigger orders through tenders.
How to build a credit score to get loans easily?
Whether you need a loan in the near future or after a couple of years, it is important to start building a credit history from today onwards to form the basis of securing favourable terms for a business loan. A few easy ways to do so are,
- Incorporate your Business: A business that is based on sole proprietorship or general partnership doesn’t allow separation between personal and business’s credit history. Incorporating a business not only tells the credit bureaus of the firm’s existence, but also protects the venture from any personal liabilities for the actions of a business. It is also helpful when businesses want to go public, raise investment capital, create tax benefits, etc.
- Open a Business Bank Account: Every firm requires a business checking account under the firm’s legal name to not only handle the financial transactions but also to maintain the liability protections offered by LLCs.
- Manage your Debt: A missed payment against debt of any kind creates a negative impact on the credit score which reflects in the credit history. An important factor to have a flawless credit history is to have a clear payment history with lenders, vendors and credit issuers. It is pivotal to watch the cash flow and have enough money to pay of any institutional credit.
- Be Rational About New Credit: Raising credit beyond what is needed alters a firm’s debt to equity ratio. It also has many unwanted interest charges attached to it.
A few agencies in India that are instrumental in building credit history by providing ratings for SMEs are Credit Rating Information Services of India Limited (CRISIL), Credit Analysis and Research limited (CARE), ICRA Limited, Small and Medium Enterprises Rating Agency of India (SMERA), Brickwork Ratings (BWR), India Rating and Research Pvt. Ltd., etc. These also have tie-ups with several banks and NBFCs that offer small business loans at preferential interest rates based on the ratings received.