Don’t owe more than you need to: Paying your credit card bills and debts on time helps to improve your credit rating. Photo credit: Unsplash
If you are thinking of getting a business loan this year, the first reality you need to confront is if you are eligible for a loan.
Different financiers have their own set of criteria but whether you are looking at a bank loan for your business, business financing or project financing, suffice to say your credit rating will certainly be taken into consideration.
But all is not as hopeless as it seems. Start taking active steps to improve your credit rating now so that you have a better chance of being deemed more creditworthy by a financier when you put in your loan application for a SME business loan.
The credit rating (or score) represents the level of risk you pose to a financier if and when a loan is granted to you. It also shows your ability to manage credit cards and loans.
The poorer your rating is, the less likely you are to get a loan for SME financing. Your credit rating will fall somewhere between the worst score of 1,000, and the best score of 2,000.
A risk grade will be generated from this rating – with AA being the best; and HH, the worst. B or C grades usually indicate a history of late payments, while D grades (or lower) may suggest a history of loan default. GX means you have no credit history to speak of, in which case your chances of getting a loan are next to zero.
The credit rating is derived after Credit Bureau Singapore (CBS) examines your credit report. The report comprises records of your credit history, including any loan requests made, as well as your credit repayments.
Your personal information, job stability, repayment history, number of credit enquiries, and history of loan defaults if any, are also factored in.
In general, banks tend to look at your risk grade instead of your exact rating or score, after which they may link your score to the probability of default (typically expressed in percentage form). The higher that percentage, the higher the risk you are deemed to pose to financiers.
Here are the specific grades and ratings, and what they mean:
Rome wasn’t built in a day; and neither is a good credit rating. But it’s worth putting the time and effort into getting a healthy rating because it has a short- and long-term impact.
So even if your credit rating isn’t great now, you should try to make it better so you can secure SME financing and that commercial loan you’ve been dreaming about.
Here are some benefits of a good credit rating:
It doesn’t just apply to business loans – a good credit rating will make it easier for your credit card or mortgage application to get approved. The reason is simple: You are now a more creditworthy bet for financiers.
With a good rating, there is a lower chance of having multiple doors being slammed in your face.
This means you have more choices to consider, which also means you can take longer to shop for better offers and interest rates. In other words, you don’t need to be forced to accept whatever is willing to even look your way – especially when you need a SME loan urgently.
Now that you have tangible proof that you are not a high-risk borrower, you can afford to negotiate more when it comes to interest rates for SME business loans. This means you may end up paying less and saving more in the long run.
With a better credit rating, you may have a higher chance of increasing the amount you want to borrow. This will give you more to work with when you are trying to get working capital or purchasing inventory for your business.
Take these steps to get a more positive credit score:
There is no bigger red alert to a financier than a potential borrower with a frequently changing residential address as it may mean you are unable to pay your rent. So try not to move house frequently.
Living at the same address for a few years is a good sign, as is working with the same employer for years, as both suggest stability in your financial and employment situation.
Get a copy of your credit report and rating from CBS or Experian so you can examine the negative or high-risk listings that contributed to your poor rating.
Some examples of such listings include multiple loan enquiries made within a short time frame, late payments, outstanding debt, loan defaults, credit cards with high credit limits, or multiple loans.
If any of these details are incorrect, get them removed by the credit reporting bureau as they can stay on your credit report for a few years.
Sad to say, a missed repayment or a series of late payments can show up on your credit report for years. So do make every effort to pay your bills on time so that such late or missed payments will not affect your credit rating adversely and affect your chances of getting a SME loan or startup loan.
If you can, pay your credit card bills in full every month – this shows you are capable of managing your credit card debt and hence, most likely a reliable borrower.
Repay as much of your debt to show that you are a responsible borrower. If you have trouble doing so, opt for a Debt Consolidation Plan.
This debt-refinancing programme allows individuals to consolidate unsecured credit facilities – such as credit cards and some unsecured loans – across multiple financial institutions with only one financial institution.
If having too much bad credit history sets you back, so does having no credit history as there is no way to prove you are a reliable borrower.
If you have no credit history, set up a credit card with a high interest and low spending limit, and make small purchases on it that you then pay for in full and on time every month.
Over time, this will have a positive impact on your credit report and increase your chances of getting a SME loan. If you are worried about forgetting to make payment on time, get a debit card instead.
Credit balances that are more than 30% of your credit card spending limit suggest you use way too much credit. Keep your balances as low as possible and pay off everything on time to prove your creditworthiness.
Every application that you make is eventually reflected in your credit report. Multiple credit card applications or loan enquiries are a sign that you are unable to manage your existing cards or debt, and hence may be unable to pay off a SME business loan or startup loan.
Set up a budget to manage your expenditure more effectively. Check your credit report regularly to make sure there are no fraudulent or incorrect entries.
If you must get a credit card, avoid making too many applications within a short time frame. Wait for a reasonable amount of time before making a new application or it may affect your credit rating.
Similarly, submitting your credit report to multiple lenders will also have a negative impact on your report.
A good alternative would be a business loan marketplace like Lendingpot, which has a partner network comprising various types of lenders. You only need to submit your credit report once through its portal to reach all these lenders at the same time. You will be contacted by lenders if any of them are interested in funding your case.
Leading digital loan marketplace Lendingpot connects SMEs to its network of 45 lenders comprising relationship managers from banks, financial institutions, and private and peer-to-peer lenders in Singapore for free. It aims to help SMEs overcome the information asymmetry problem and lack of transparency prevalent in the SME financing sector by offering SMEs financing options such as business term loans, property loans, revenue-based financing, credit lines, working capital loans, bridging loans, invoice financing, and more.
Need SME financing or project financing? We have 45 lenders onboard our digital business loan marketplace to help you.
Belinda loves thinking about random stuff, and collecting useless bits of facts and trivia. She often roots for the underdog, and believes the world needs more happy endings.