Corporate credit score
Corporate credit score is a 1-digit number ranging from 1 to 10. The closer the rank of the company is to 1, the better is the credit health. The likelihood of missing payments of a company is indicated by a CREDIT SCORE Rank. This is the prime factor considered by the lending party while evaluation of a loan application. The better the CREDIT SCORE rank, the higher are the chances of securing a loan.
An extravagant document that represents the financial health of a company that is compiled on the basis of information received from varied credit institutions is called as Company Credit Report (CCR). This report is utilized by lenders for estimating the creditworthiness of a company before granting a loan. Basically, the past payment behaviour of an organization is a strong indication of its future behaviour. A particular CCR includes various financial objects. The corporate report provides all the background information such as subsidiary and parent companies, years of operation, ownership, etc. The financial information of the company is stated in detail that determines the appropriate credit levels that lenders can let them borrow. The financial history is also mentioned including collections, revenue generation, repayments, and more.
What are the factors that influence the company credit report?
CREDIT SCORE prepares the CCR for your company after having a good look at the traits and financial history of your company. Here are a few factors that impact your organization’s CCR:
- The credit utilization ratio of a company is represented by the credit to debt ratio. It is also called a balance-to-limit ratio which refers to the amount of debt that you currently have, versus the quantity of credit that is available with you. A credit to debt ratio represents the credit utilization ratio of a company. When a company is spending its borrowed funds faster than expected, it indicates a higher credit utilization ratio. This can have a negative impact on the CCR. A low debt-to-credit ratio is a crucial part of maintaining a strong credit score in the CCR.
- Every company requires operation funds to meet the daily expenditure of a business cycle. These finances are availed through loans which have to be paid via EMIs. Individuals, as well as companies, should pay their EMIs on time as a high-quality indicator of financial health. There should not be an increased trend in slow payment of the obligations of the company.
- The amount of debts outstanding or the external debts can have a negative impact on a company’s CCR as credit institutions take into consideration the outstanding amount. Hence, it is crucial to maintain and keep only feasible amounts outstanding. Just focus on paying back as much as possible if you are carrying balances on your corporate credit cards. As said on the Experian website, reducing these balances will immediately impact your credit score in a positive way. If your payment history is good, you can also apply for an increased credit limit as this will improve your credit ratio in your debt-to-equity ratio. It is indicated that you should not be using any more than 20 to 30 per cent of your available credit lines at any specific time.
- The size and life of a company are very important factors to be considered here. Older and larger corporations have a sound and well-established financial history, hence they are sought to be more credible in comparison to new businesses and start-ups. The recency, status, dollar amounts, and frequency of any applicable judgements, liens or bankruptcies are a vital feature influencing the CCR of an organization.
- Particular industrial sectors have a higher risk and impact on a company’s CCR. For instance, if your company works in the oil and gas industry which is considered of having a high volatility due to international market conditions, the company will be considered less creditworthy in comparison to companies from many stable sectors such as banking and insurance. Also, similar to individual CCR, a company’s CCR also works in an identical way. If the credit utilization of a company is higher, they seem like credit hungry and thus, it is considered less creditworthy.
- If a company already has many numbers of business cards, the smart way is to evenly distribute the balances across all the active cards. This will help lower the overall debt-to-equity ratio, thereby improving your credit score. The total amount you need to repay can also be reduced when you transfer some of the balance to cards that have lower rates.
- Many businesses close the unused accounts which may hamper their credit score. There might be many credit accounts for your company that you hardly use and that don’t have balance, however, don’t close them completely. The amount of available credit is reduced when you close an account which can affect your credit score. When you keep these accounts open, it also gives you another alternative for spreading out the remaining balances available with your business.
- The credit monitoring of the firm must be done accurately and from time-to-time. One way to do this is to order credit reports from at least three reporting agencies once or twice a year for assessment of any changes that have occurred. Contact the reporting agencies if any incorrect information appears on them. You can ask the entity that is reporting this erroneous information to have it removed. Anyways, ordering the credit reports do not negatively impact your credit score.
- In cases where you have a good payment history with your suppliers and vendors, enquire with them if they are informing the credit reporting agencies of the timely payments made by you. Similar to reporting agencies for consumer credit, there are agencies for corporate credit such as Dun & Bradstreet, Experian and Equifax. The corporate credit score will increase with a positive report from a vendor. You can also order your credit report from these agencies to look for signs of fraud or mistakes if any.
There are several ways in which your company commercial report can be improved. Following are a few of them:
- If you are using your company’s corporate card or credit card, ensure that you pay the EMIs on time, as an outstanding debt can have harmful impacts on your CCR. Eventually, the CREDIT SCORE Rank could also come down.
- The most appropriate way to improve your CCR is to immediately pay back your existing and outstanding EMIs. Whether it is a loan taken in the name of the company or a personal loan, you must ensure that you pay the complete outstanding amount on the due date. This will improve your credit score over time.
- Keep yourself updated with the company’s latest credit statements and transactions because many times credit institutions and banks tend to make a mistake. If such an error arises, it is better to get it rectified right away.
- Always keep watchful eyes on the amount of money coming inside/going outside the company. This is an excellent way to check your credit limit and will help you understand the sum of credit you can borrow from a bank. Another option that you can opt for is to avail a long-term loan and paying it on time. This creates a superior image of the company in front of the bank.
Individual credit score
An Individual Credit Score is a three-digit number that lays between 300-900, 300 being the lowest. It actually represents the creditworthiness of the person. A high Credit score suggests good credit history and a responsible repayment behaviour. Credit score is one of the most crucial factors that all. A high Credit score signifies your integrity and not only your excellent financial discipline. Every time you apply for a credit card or loan, your last six months credit score is checked. Usually, any score above 700 is considered excellent, though some banks some do not mind lowering the standard and keeping the bar high.
How to improve individual credit score?
A bad credit score is not irreversible. You can improve your score by doing the following. You need to note that it will take at least six months to see a considerable change in the credit score and ‘improvements’ on your credit report.
- One must analyse their latest credit report: In this way, you can actually understand your credit position on a whole and where exactly you slipped. So, if you realise that your low credit score is because of a few delayed payments, then you need to take special care that it does not happen again. Errors can be corrected in such a manner and targets for at least the next six months can be set.
- Postponement of payment is a really bad idea: Since there is a huge advance in technology, the number of procrastinators is rising daily. People do not want to make their payments on time and wait for the due date, or sometimes even after that. However, CREDIT SCORE does not accept such excuses, you just have to pay your EMIs and dues on time. There is no other option because if you do not, then your score will fall. In order to avoid unintentional delays, it is a better option to automate your payments.
- You should have a diverse credit folio: The reason for this is that it acts as proof to the lender that you are an expert at handling different types of credit. So, you can actually have a blend of unsecured loans (personal loan, credit card) as well as secured loans (car loan, house loan). However, a higher inclination towards unsecured loans are frowned upon so you have to take care of that as well.
- Just remember, never have unused credit cards: You might feel they are just lying in your pocket and it cannot cause any harm. But it is never a wise idea to keep one or more idle credit cards. Just use it for small purposes such as fuel, grocery, and repay it at the beginning of the next month. Don’t be scared of maximising the limit because you are making only small expenditures from it, just for the sake of it. However, if you really do not want to use a specific credit card, then just close it. Avoid keeping an active credit card idle.
- Almost every person has debts, some might have more, while others may have a small amount: However, it is important how you handle debts. If you do it smartly, then your credit score will improve over time. We are well aware of how a credit card works for revolving credit. That is why, if you are not careful, you can get unmanageable. Closing off the credit card dues with the help of a personal loan is a smart move in such cases. This solves the problem immediately and you have to pay a lesser amount of interest too.
- Three lakh is your borrowing limit? You do not have to max out the credit limit always: One does not have to spend the entire three lakhs and then stress out on paying the dues, the following month. One also needs to make sure ensure that the balance of debt-to-income ratio is not distressed.
- Prolonging tenures is never a good idea: The tenure of credit or loan is an important factor that can have an impact on your credit score. For instance, if one has taken a personal loan with three years tenure, and have increased the tenure halfway for a smaller EMI, the Credit score can drop at that point of time.
Corporate credit score vs. Individual credit score
Corporate Credit Score is basically the credit score for businesses and Individual Credit Score is the credit score of one particular person. The former is ranked from 1 to 10, with 1 being the highest. While, the latter is ranked from 300 to 900, with 300 being the lowest. Business CREDIT SCORE is required to understand how good is the business in paying back their payment dues, which is important in making decisions, such as granting of loans, etc, while Individual Credit Score suggests the creditability of the person to pay back his/her credit dues.
For any queries regarding Credit Score improvement or Loan contact Credit Bazaar CR Arcade 2nd Floor, Opposite Delta Garden, Next to Shree Mahalaxmi Restaurant, Mira Road East, Thane : 401107