With over 42.5 million SMEs functioning out of India, the financial sector needs to be prepared to extend tools of small business financing to them. Extending small business loans to the SMEs in India will not only help better the economy, as this sector employs 40% of the country’s workforce, but also contributes 45% of the manufacturing output of the nation. However, a key factor that is often overlooked by the industry is the financial soundness or even awareness that small businesses have, even before expecting any sort of small business loan or other financial means from financial organizations.
We’ve often heard that preparation is the key to success. It is no different when for when an SME in India decides to apply for a loan. While there are a lot of factors that determine whether a small business will be granted a small business loan or not, let’s look at three Cs that will definitely play an important role.
- Credit History
A credit history is the record of a borrower’s responsible repayment of debts. In simpler terms it is the evidence of the timely repayment of (or even the lack of repayment of) any line of credit that was extended to you or your business. It also records the organizations – such as banks and other lenders that have agreed to extend a financial aid to you or your institution. The credit bureau operational in the country is chiefly responsible for maintaining all these records, with help from data that is shared with the financial organizations operating in the country.
Your credit history helps a lender gauge whether or not you have the capabilities to return the credit they extend to you. This further reemphasizes the importance of making repayments on time.
- Credit Score
Each financial organization is supposed to send financial data of an individual or an entity to the Reserve Bank of India. This data is then used and updated to compound and adjudge the person or institution with a credit score.
A credit score is a numeric statement that is awarded out of 900 points. The credit score can be even zero for some individuals. Parameters such as credit history, debt, time in file – or the age of the filing of the account of the individual, account diversity are some of the factors that help determine the credit score.
The higher the credit score, the better the chances of an organization receiving a line of credit such as small business loans.
The creditworthiness of an individual or business is an estimate of payment default that they might make. Credit score and credit history are both relied upon to determine the creditworthiness of a person and/or organization.
The easiest ways that businesses can improve their creditworthiness is by making all their payments or at least most of their payments on time. Also, by maintaining a 35% debt-to-income ratio, a business enhances their creditworthiness.
Keeping yourself updated about the three Cs of loans procurement can serve businesses and their owners well.