Decoding Credit Health: What MSMEs Should Know Before Taking a Loan

At its core, a credit score is a three-digit number that reflects your creditworthiness. It is a summary of your credit history, including how you’ve handled borrowing and repayment in the past. For MSMEs, there are two key types of scores:

1. Your Personal Credit Score (CIBIL Score)

 
This is the most well-known score (300 to 900) that tracks your personal financial history. When a lender assesses a small business loan application from an MSME, they almost always look at the owner’s personal credit score first. A high score (generally above 750) tells them that you are a responsible borrower.

2. Your Business Credit Score

 
This score tracks your business’s credit history and measures its ability to repay its commercial debts. A strong business credit score is crucial for securing a large business loan or a loan against a business asset.

Why It’s So Important

 
Your credit health is the key that unlocks financial opportunities. It determines:
 

• Eligibility: Lenders use your score to decide if they will approve your loan application.
• Interest Rates: A high credit score can get you a lower interest rate, which can save your business lakhs of rupees.
• Loan Amount: A good score can make you eligible for a larger loan amount.
• Approval Speed: A high score can lead to a much faster loan approval process.

A credit score is calculated based on several factors, and understanding them is the first step to improving your score.

1. Your Payment History (The Most Important Factor)

 
This makes up about 35% of your score. It is a record of whether you have paid your debts (business loans, credit card bills, EMIs) on time. A consistent history of on-time payments is vital.

2. Credit Utilization (How Much You Owe)

 
This is the amount of debt you have compared to the total credit available. Lenders prefer to see this number as low as possible (ideally below 30%). It shows that you are not overly dependent on credit.

3. Length of Credit History

 
A longer credit history with a consistent record of on-time payments shows stability and a proven track record.

4. Types of Credit Used

 
Lenders like to see a mix of credit types, such as a secured loan like a loan against property and an unsecured loan like a credit card. It shows you can responsibly manage different kinds of debt.

The good news is that your credit health is in your control. Here are some actionable steps you can take:

1. Pay All Your Bills and EMIs on Time, Every Time

 
This is the most important step. Automate your payments for all your loans and credit cards. If you have a Vyapari Loan, ensure you never miss an EMI, as this will have a direct and positive impact on your score.

2. Lower Your Credit Utilization

 
If you are using a high percentage of your credit limit, try to pay down your balances immediately. Try to keep your utilization below 30%.

3. Check Your Credit Report for Errors

 
Get a free copy of your credit report from a credit bureau and review it carefully. If you find any errors (e.g., a missed payment that you actually made), report them immediately to get them corrected.

For a small business owner, it’s easy to get confused between your personal and business credit scores.

• Your Personal Score: Tied to your PAN and Aadhaar. It tracks all your personal borrowing. For most MSME loans, lenders rely primarily on your personal score because the business may not have a long enough history.
• Your Business Score: Tied to your company’s identity. It tracks your commercial borrowings. As your business grows, this score becomes more important. For a new MSME, the best way to start building a business credit history is by taking on a loan like a Small Business Loan and repaying it on time.

If you’re a new entrepreneur and your business doesn’t have a credit history yet, here are a few ways to start building one:
 

• Apply for a Small Business Loan: Taking on a small, manageable loan and repaying it on time is the fastest way to build a positive credit history.
• Apply for a Business Credit Card: This can help you manage your daily expenses and build a credit history at the same time.
• Keep Your Personal Credit Clean: For a new business, your personal credit score is your biggest asset. Keep it in excellent shape to make a good impression on lenders.

A loan should always be a **strategic move**, not a last resort. The best time to take a loan is when your business is healthy and growing:
 

• For Expansion: When you see an opportunity to grow, a loan can provide the capital you need to seize it.
• To Improve Cash Flow: A loan can help you manage a temporary cash flow gap, ensuring your business operations continue to run smoothly.
• For Major Investments: A loan can help you purchase an asset, such as a new piece of equipment, that will generate more revenue in the long run.

Your MSME’s credit health is more than just a number—it’s a reflection of your financial discipline and a key to your future success. By understanding what influences your credit score and taking proactive steps to improve it, you can open doors to better financial opportunities.
 

Remember, a strong credit score can get you a lower interest rate, a higher loan amount, and a faster approval process. At Credit Saison India, we are committed to making the loan application process as smooth as possible. Whether you need a Vyapari Loan to manage your daily expenses, or a Loan Against Property for a major investment, we are here to support you with confidence.