Why Business Credit Score Matters And How Women Entrepreneurs Can Build It

Similar to an individual credit score, businesses can also build a credit score that reflects their financial health. A healthy credit score acts as a financial passport, building trust and credibility with lenders. For women-led MSMEs, a strong credit score can be an equaliser in the credit process, shifting focus from biases to business advantage.

What Is A Credit Score?

A credit score is a numerical presentation assigned by the authorised credit bureaus, such as CIBIL, CRIF High Mark, Experian, and Equifax, indicating the borrower's or business's creditworthiness. The scores typically range from 300 to 900. Both individuals and businesses can have credit scores. A business credit score is arrived at by assessing a number of variables, including the company’s payment history, credit availed, credit utilisation, etc. A higher credit score is often associated with a stronger ability to repay and hence increases the chances of getting formal credit.

Importance of Credit Scores For MSMEs

• Helps access formal sources of credit: Formal capital enables MSMEs to have funds at reasonable rates with well-defined terms and conditions and empowers them to invest in the business, pursuing growth opportunities. In fact, companies with a timely repayment track record are more likely to get larger sums than those with low credit scores. This is particularly beneficial for women entrepreneurs who may be first-time borrowers and can use a growing credit history to scale operations and build resilience.

• Favourable interest rates: A good credit score reflects a strong repayment history and better reliability. And hence, MSMEs with high credit scores are generally perceived as low-risk borrowers, and lenders tend to provide them with more favourable interest rates. For women-led businesses, lower interest rates can be a game-changer, allowing for more manageable repayments and faster reinvestment into their enterprise.

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Dos And Don’ts For A Strong Business Credit Score For Women Entrepreneurs

Maintaining a high credit score is crucial for businesses as it can affect their ability to obtain credit and the terms on which it is offered. Here are some tips to ensure that a business’s credit score is always high:

• Make payments on time: It is important that all the bills are paid on time to maintain a high credit score. Late or missed EMI payments can significantly damage the business credit score. Timely repayments not only improve creditworthiness but also reinforce confidence in women borrowers, proving their financial discipline to lenders.

• Improve financial performance and monitor credit reports regularly: Keeping up strong financial performance, including profitability, cash flow, and revenue growth, can positively impact a business’s credit score. Credit reports, accessible through credit bureaus, give a comprehensive view of the business’s profile like legal name, registration number, address, industry classification, business’s borrowing activities - the number of credit facilities, type of credit availed, last repayment, credit score, public records -legal filings, bankruptcies or court cases. Encouraging women entrepreneurs to routinely check and understand their business credit reports can be a powerful step toward financial literacy and independence.

• Avail at least one credit product: One of the key parameters assessed to arrive at a credit score is payment history. For women-led MSMEs, even a small loan managed well can open the doors to more significant financing opportunities in the future.

• Keep credit utilisation low: Credit utilisation is the percentage of credit that a business is using out of the total credit that it is eligible for. Keeping it below 30% is ideal.

• Avoid applying to multiple lenders: Applying for a loan with multiple lenders at the same time can negatively impact your credit score. Each application results in a hard inquiry, i.e., lenders raise an inquiry with credit bureaus to evaluate the creditworthiness. Multiple hard inquiries in a short period is considered as a reflection of finances not being managed effectively, and this can lower the credit score. Further, applying with an RBI-registered lender is also crucial as it safeguards the business from predatory lending practices.

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The financial stability and expansion of an MSME are significantly influenced by access to formal capital. A good credit score not only makes capital easier to access, but it also makes it easier to get better loan terms, lower interest rates, and higher credit limits. By maintaining a high score, MSMEs can strengthen their company's reputation, secure better financing, and ensure long-term growth.

And for India’s women entrepreneurs, building and maintaining a strong credit score is not just a financial necessity; it is a strategic tool for empowerment, enabling them to scale and thrive in the business world.

This article is authorised by Hardika Shah, CEO & Founder, Kinara Capital.

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