Credit score for business owners: what affects it

Two records, not one

India’s credit information companies, commonly called credit bureaus, collect repayment data from banks, NBFCs and other regulated lenders. From it they produce two different things.

• A personal credit report and score for each individual, covering home loans, vehicle loans, personal loans, credit cards and any business loans taken in the individual’s name. The score is a three-digit number on a scale of 300 to 900; higher is better.
• A commercial credit report for a business entity — a firm, LLP or company — listing its credit facilities and how each has been conducted. Bureaus also assign businesses a rank or score of their own, on a different scale from the personal score.

A proprietor and the proprietorship are the same person in law, so a proprietor’s business borrowing usually appears on the personal report. Partners and directors are assessed on their personal reports as well, since they normally guarantee the firm’s loans.

What drives the score

Bureaus do not publish their exact formulas, but the main factors are well established.

Repayment history carries the most weight. A single delay of a few days can be reported, and the record of each month stays on the report for years. Nothing repairs a score faster than a long, unbroken run of on-time payments, and nothing else can substitute for it.

Soft enquiries and hard enquiries

Each time your report is pulled, the bureau records an enquiry. There are two kinds, and the difference matters.

• A soft enquiry is a check made by you, or with your consent for an eligibility or pre-qualification check. It does not affect your score and is not shown to lenders as a credit application.
• A hard enquiry is recorded when you make a formal application and the lender pulls your report to take a credit decision. It is visible to other lenders and can lower the score slightly for a time.

One hard enquiry is unremarkable. Several within a few weeks tell lenders that you are seeking money urgently from many sources, and that others may have declined you. Compare options first through soft checks, then apply formally to the one or two lenders most likely to approve. The way lenders read the rest of your file is covered in how lenders assess a small business loan application.

Guarantees count as your own debt

If you stand guarantor for a relative’s or associate’s loan, that loan appears on your credit report. If the borrower pays late, the delay is recorded against you as well, and lenders count the guaranteed amount when judging how much more you can borrow. The same applies to joint loans and add-on credit cards. Sign a guarantee only if you are prepared to repay the loan yourself.

Reading your report and correcting errors

You are entitled to a free full credit report from each bureau once a year. Read it line by line.

1. Check personal details: name, PAN, date of birth, addresses.
2. Check that every account listed is yours. Accounts you do not recognise may be clerical mix-ups or misuse of your identity.
3. Check the status and balance of each account, especially loans you have fully repaid.
4. Check the month-wise payment record for delays you do not agree with.
5. Check the enquiry list for applications you never made.

If something is wrong, raise a dispute with the bureau through its website and write to the lender concerned as well, because the bureau can only correct an entry once the lender confirms it. Keep proof such as the closure letter or the statement showing payment. Bureaus and lenders are required to resolve disputes within a fixed period, generally thirty days.

Habits that protect your score

• Pay every instalment and card bill on or before the due date; set up auto-debit and keep the balance ready.
• Keep utilisation of cards and overdrafts moderate. If you regularly need the full limit, ask for a higher one rather than run at the ceiling.
• Do not apply to many lenders at once.
• Keep your oldest well-conducted accounts open; they lengthen your history.
• Keep business and personal borrowing separate where you can, so that each record is clean and easy to read.
• Review your reports at least once a year and before any important application.

The eligibility check on Vaanij Capital is a soft check, so seeing which regulated banks and NBFCs may consider your business does not affect your score. A hard enquiry arises only when you go ahead with a lender’s offer.

This article is general information for business owners. It is not financial advice — loan terms are set by the lender, so read the lender’s own documents before you commit.