Why should you have a good credit score to start a business? Here are 8 key reasons

Do you want to start your business in the near future? If yes, then it is important to understand that having a good personal credit score will come in handy when considering business loans for cash flows and growing your business.

The credit score is a three-digit numeric that is assigned to individuals and companies by credit bureaus such as Credit Information Bureau (India) Limited (CIBIL). CIBIL is the most important bureau and it is generally used to depict credit score. A score above 700 is considered as a good credit score.

In this article, we will look at the top benefits of having a good personal credit score and how it impacts your business.

Access to business loans: We all know that a high credit score can make it easier for you to secure loans. And, it can also help you to get business loans, especially when you are just starting out and don't have your business credit report.

Banks before disbursing business loans also look at the owner's credit score as well. So, if you have a high credit score, you get a business loan with favourable terms, repayment flexibility and lower interest rates.

Better credit terms: Individuals with good credit scores often have the luxury of choosing flexible repayment options and higher credit limits.

When you have a good CIBIL score, banks will be more interested in offering you long-term business loans if you want the flexibility to repay the loan in smaller instalments over an extended period. A good CIBIL score acts in your favour to create trustworthiness for long-term loans.

Lower interest rates: One of the benefits of having a high CIBIL score is securing business loans at lower interest rates. The credit score is one of the most important aspects that impact the interest rate.

If you have a high credit score and no previous loan defaults, it signals high creditworthiness to lenders. Hence, you become a low-risk borrower for the financial institution and they become confident about your repayment capacity.

As a result, you might get business loans at attractive interest rates, typically between 12% to 18%. And if you are repaying the loan over the long term, then a difference of 0.50% also makes a huge difference.

Faster loan approval process: A high credit score also accelerates the loan approval process. Depending on whether you apply for the business loan online or offline, the loan amount can be disbursed within 3 to 15 working days. This convenience allows you to get started with your business plans without delays.

Lower insurance premiums: As a business, you might have to get insurance for your establishments, machinery etc. This is important to safeguard yourself against fire and theft among others.

Insurance companies can also consider your credit score and a high credit score can translate to lower insurance premiums which helps you to get coverage at a lower cost.

Higher negotiation power: If we have to culminate all the benefits that come with a high CIBIL score, then it is definitely the high negotiation power that comes with a high credit score.

With a higher negotiation power that makes you feel like a God, you can minimise the interest rate, get multiple flexible repayment options and get the loan amount disbursed to your bank account at the earliest.

Maintain cash flow without issues: Cash flow is a major issue for a lot of small businesses. And loans can help you tide you over this problem. Having a good credit score can ensure that you don't face problems with cash flow and you can continue with your day-to-day business operations without any issues.

Get investors onboard: Do you want to onboard seasoned investors in the near future? Investors can help you to grow your company faster through their insights and connections. Moreover, having them onboard also opens up a lot of doors for you and your company that can fast-track the growth trajectory of your company.

In addition to your product, market and growth potential, investors will also look at your credit score and past borrowing records. Having a good credit score makes it easier for investors to invest and trust in your business as it shows that you can manage loans and other credit products effectively.

In conclusion, if you are looking to have to start your business, taking care of your credit score is also important. You can check your credit score at regular intervals, take note of discrepancies and get it resolved with the linked financial institution. It is important because many times people think that they have a good credit score as they are paying their EMIs and bills on time.

Padmaja Choudhury is a freelance financial content writer. You can reach out to her at padmaja@padmajachoudhury.com