Trade & Industry Advisory
27 May 2020 • 9 min read
7 Expert Tips for SMEs to Improve Credit Score
Improve your credit score by being tax compliant, maintaining a single bank account, using banking channels, paying dues on time, keeping a good personal credit history.
Finance is the key factor that determines the expansion and development of any business concern, regardless of size. But access to finance is contingent on businesses having good credit scores – no bank or non-banking financial companies or NBFCs will lend to businesses with bad credit scores.
It is especially important for small businesses to have easy access to finance because they can suffer from cash flow problems, which hampers growth. This is why SMEs must especially ensure that they maintain good credit scores. Unfortunately, many small businesses neglect this important point.
In India, your credit score ranges between 300-900, with 300 being the lowest. On average, to qualify for any kind of small business loan, businesses need a credit score of at least 650. But around 67% of Indian SMEs have scores between 300 and 650. This is a matter of concern.
In this blog, we will list seven expert tips SMEs can use to improve their credit scores.
1. Be Tax Compliant
Keeping good accounting records has several benefits for small businesses. Among other things, it helps you manage your cash flow and makes it easier for you to file tax returns. It is advisable to use good accounting and taxation software such as Zoho, Quickbooks and Tally for this. You must also make it a habit to consult your chartered accountants whenever you need to make TDS payments or prepare financial statements. These best practices will help you close your accounts effortlessly at the end of each financial year, and will go a long way in helping your business improve its credit score.
2. Maintain A Single Account
It is common for SME owners in India to operate separate business and management accounts for tax-filing purposes. SMEs should avoid doing this. It is advisable for each SME to operate just a single account because that shows that the business is following a transparent accounting system, which is a plus point in the context of getting a good credit score. Always use a good quality accounting system to track sales, check inventory, and monitor purchases and payments from vendors.
3. Use Banking Channels To Become Credit Worthy
Once SMEs start using channels such as banks and online payment solutions for payments and receipts, all transaction records become easy to track, enabling smooth audits. This gives your business credibility and a good credit score, helping you to avail of bank overdrafts, working capital loans or higher draft and cash credit limits. All of this will help you grow your business exponentially.
4. Pay All Dues On Time
We cannot emphasise this point enough. It is extremely important for a business (or an individual) to have a clean payment history if they want a good credit score. Credit officials go deep into payment histories of SMEs (and individuals) to determine their credit score. These payments include EMIs, credit card payments and even small loans. Non-payments, default payments, untimely payments, and unclear source of funds used for payment can hurt your business’s efforts to improve its credit score.
5. Personal Credit Scores Matter Too
Though most people keep their business and personal credit histories separate, credit officials often take into account the personal credit score of owners or directors of SMEs while determining a business’s credit score. In fact, in the case of sole proprietors, the firm and owner are treated as a single entity – so the credit score of the firm is in the proprietor's name.
This is why owners or directors of all SMEs must maintain good personal credit scores by repaying their loans and credit cards on time. Not doing so can hurt the credit score of their businesses.
6. File GST Returns On Time
No matter what the scale of your business, you must file your GST returns on time. You can easily do this if you keep track of your accounting records digitally. If you are disciplined in maintaining accounting records, you will ensure that you get your TDS and other GST-linked payments quite easily. Filing GST returns on time is also critical because several banks and NBFCs check GST filings before providing businesses with any loans.
7. Go Digital
As is the current trend, going digital is the way forward for businesses worldwide, including SMEs. Using digital payments methods – such as internet banking, mobile wallets, UPI, NPCI, wire transfers, or even RuPay cards – reduces transaction costs drastically and also leads to clearer and cleaner record-keeping. These are things credit officials like to see.
As is evident, getting a good credit score for an SME is not rocket science. You can do it if you just keep your accounts clean and transparent.
Following these seven tips and maintaining accounting discipline might seem difficult at first, but if you persevere, it can soon become a habit and your credit score will soon reach the goal you have set.
Once you have a good credit score, you can maintain it by:
- Making timely payouts.
- Keeping your credit balances low.
- Managing company debt.
- Following proper processes when you close old debt accounts.
- Keeping an eye out for feedback.
To conclude we’d like to emphasise again that it is extremely important for an SME to improve its credit score if it wants access to finance that will help the business grow.