Businesses take out business loans to meet a variety of needs, including business expansion, purchase, production costs, working capital, and emergencies. Business owners can take business loans from the bank capital market and non-banking financial institutions. However, if you are willing to go for an unsecured business loan, you need to have a good credit score. Your credit score improves with time and good credit activities. Let’s plan out some effective and easy ways to keep your credit score eligible for affordable small business loans.
Six ways to improve your credit score
- Maintain a consistent pattern of bill payment
In order to improve your credit score and be eligible for a business loan, you need to improve your credit score. Your credit score is one of the important factors that decide your business loan eligibility. There are various ways in which you can improve your credit score. Making payments on time is one of the most important ways. Make sure you make payment by the due date without delay or missing it. Having a clean track record always helps you build your credit score in a faster manner. In order to avoid delays, you can always automate your payment or set reminders. This way, it will be easy to improve your credit score to be eligible for a small business loan.
- Keep your credit accounts open
The most popular credit accounts are overdrafts, loans, and credit cards. These accounts, when active, add a lot to your credit score positively. If you have a credit account with a long credit history, it is important to improve your credit score faster. The longer the credit dates, the better improvement it will show in terms of credit score improvement. Even if you do not use your credit cards, you can keep them active to improve your credit scores. Keeping your credit account open will always help in building your credit score.
- Pay your entire bill in full, with no outstanding balances
This is applicable to individuals with existing credit cards or multiple loans. When you make a payment, you need to ensure that you are paying the full amount of the bill. It is true that credit cards do offer minimum bill payment, but one should not opt for the same. It is important to pay the entire bill amount without keeping any overdue amount pending. When you keep the outstanding amount, it leads to an expensive loan and damages your credit score as well.
- Maintain a balanced credit utilisation ratio
Every credit card or loan comes with a fixed credit limit. It is not recommended at all to exhaust the entire credit limit that is available. You need to keep a balanced credit utilization ratio by making payments on time. If you end up exhausting the entire credit limit, make an extra payment so that you get back the available limit.
- Maintain a balanced credit mix
A credit mix is critical for improving your credit score. It is not recommended to have only secured or unsecured loans in your credit profile. Manage your credit mix in such a way that you have both secured and unsecured loans in your credit account. The right credit mix always improves your credit score faster.
- Do not apply for more than one loan
It is very common for individuals to keep applying for multiple loans even after receiving rejections. Stop doing that immediately. When you apply for a loan, a hard inquiry is run on your credit profile by loan providers. This eventually leads to credit damage. Therefore, it is recommended to not apply for multiple loans within a short span of time.
The Benefits of Having a Good Credit Score for Business Loans
- Low-interest rate and low-cost business loan
A credit score represents the creditworthiness and stability of an individual in terms of finances. An individual’s having a good credit score signifies good credit health. Therefore, financial institutions offer affordable business loans to business owners with good credit health. There is less risk in offering business loans to low-risk business owners. This means individuals with a high credit score always find it easy to get an affordable business loan. The same can be calculated with a business loan calculator. The rate of interest is always low when the measure of risk is minimal. The rate of interest is an important factor that makes your loan expensive or affordable.
- Good negotiation power
Having a good credit score is always important for business loans. If you are able to build a good credit score, you get the space to negotiate with your loan provider for better terms and conditions. Business owners with good credit scores and health can negotiate for a better rate of interest, loan tenure, loan amount, and terms and conditions. This overall ensures that the borrowing is done in a smooth and hassle-free manner.
- Loans with a high principal value are approved
Business owners with a good credit score always have the advantage of getting a high business loan amount. With a good credit score, the measurement of risk is always low. This makes it possible for business owners to get a high principal loan value sanctioned for better opportunities in business.
Small business loans are taken by startups and small-to medium-scale businesses. It is always recommended to use a business loan calculator to compare the best available loan providers in the market, so stop getting an affordable business loan to meet all your business expenses.