Why Credit Score Matters

Why Credit Score Matters

Why Credit Score Matters & How MSMEs Can Improve It

A practical guide for MSMEs to build strong financial credibility and access better loan terms.

A strong credit score is no longer just a number for individuals—it has become a critical success factor for MSMEs too.
Whether you are applying for working capital, a machinery loan, invoice finance, or unsecured business funding, lenders look closely at your business and promoter credit profile.

A good credit score helps you borrow at competitive rates, access higher limits, and build trust with lenders.
A poor score, on the other hand, can delay or reduce your funding options—sometimes even when your business is performing well.

What Is a Credit Score for MSMEs?

Your credit score (CIBIL, CRIF, Experian, Equifax) is a rating that reflects your:

• Credit repayment history
• Loan behaviour
• Overdues or defaults
• Credit utilization patterns
• Banking discipline

For MSMEs, lenders typically evaluate:

• Promoter’s personal CIBIL score
• Business CIBIL/Commercial score
• Overall credit behaviour across banking channels

Most NBFCs and banks prefer:

• Promoter CIBIL Score: 700+
• Business Commercial Score: CMR Up to 5

Why Credit Score Matters for MSMEs

1️ Higher Chances of Loan Approval

A strong credit score gives confidence to lenders that you are disciplined in your obligations.
This significantly increases approval probability for:

• Term loans
• Working capital loans
• Line of credit
• Equipment finance
• Unsecured short-term loans

Lenders reward responsible borrowers with easier access to credit.

2️ Better Loan Terms & Lower Interest Rates

Good scores often translate into:

• Lower interest rates
• Better pricing
• Higher loan eligibility
• Lower collateral requirement

A poor credit score means lenders must take more risk—and may charge higher interest or reject proposals altogether.

3️ Faster Loan Processing

Credit scores help lenders make decisions quickly.
With a high score, documentation is simplified and approvals are faster—critical for MSMEs who require funds urgently.

A weak score delays approvals, increases scrutiny, and may require additional checks.

4️ Helps Build Long-Term Banking Relationships

Banks prefer clients who maintain clean repayment records.
A good score strengthens relationships and ensures smooth approvals for future expansions such as:

• New machinery
• Additional working capital limits
• Larger business lines of credit

Your growth becomes faster when banking partners trust your financial discipline.

5️ Enables Collateral-Free Loans

For products like:

• Unsecured Working Capital
• Avid Powerline (WCDL)
• Small-ticket business loans
• Vendor financing

A strong credit score is the biggest factor for approval.
If your business needs quick, collateral-free funds, then credit score becomes the key enabler.

Major Factors That Affect Credit Score

Lenders assess your score based on:

• Repayment history (most important)
• Credit utilization (how much you use out of available limits)
• Outstanding overdue EMIs
• Cheque bounces/DDRs
• Loan write-offs or settlements
• Credit mix (secured vs unsecured)
• Length of credit history

Understanding these parameters helps MSMEs work strategically to improve their score.

How MSMEs Can Improve Their Credit Score

Here are the most effective steps:

1️ Pay EMIs and Credit Card Dues on Time

This is the single biggest factor.
Even one missed EMI can negatively impact your CIBIL score.

A simple thumb rule:

Set auto-debit for all business and personal loan repayments.

2️ Avoid Cheque Bounces or Insufficient Balance

Frequent cheque bounces signal poor cash flow discipline.
Lenders track your banking behaviour, including:

• Return charges
• Bounces
• Continuous low balance
• Negative account operations

Maintaining a healthy current account improves both banking score and lender trust.

3️ Reduce Credit Utilization Ratio

If you constantly use 80–100% of your CC/WCDL limits, it negatively affects your score.
Aim to maintain some buffer.

This signals lenders that you are not overly dependent on debt.

4️ Avoid Loan Settlements or Write-Offs

Many MSMEs opt for “settlements” thinking it closes the loan.
But in reality, it hurts the credit score for years.

Always prefer restructuring or repayment plans instead.

5️ Maintain a Clean Mix of Secured & Unsecured Loans

Too many unsecured loans reduce credit strength.
A healthy mix indicates responsible borrowing.

6️ Review Your CIBIL/Commercial Report Frequently

Sometimes errors or old data stay on the report.
Regular monitoring allows you to:

• Identify mistakes
• Report incorrect entries
• Update closure of old loans

Correcting these can significantly improve your score.

7️ Build a 6–12 Month Positive Banking Track Record

Lenders today rely heavily on banking data.
To strengthen your profile:

• Keep consistent monthly credits
• Avoid cash-heavy operations
• Maintain stable balances
• Show positive month-on-month trends

A strong banking track improves both creditworthiness and loan eligibility.

8️ Manage Vendor and Customer Cycles Efficiently

Delayed receivables often lead to repayment delays.
Using solutions like:

• Invoice discounting
• Short-term WCDL
• Avid Powerline

can help manage cash flow and avoid overdue EMIs.

Real Example: How Credit Score Affects an MSME Loan

Profile	Promoter Score	Outcome
Case A	760	Fast approval, lower rate, higher limit
Case B	670	Extra checks, moderate rate, restricted limit
Case C	600	High rate, collateral needed, slow processing
Case D	< 550	Likely rejection

This shows how crucial your score is for smoother business growth.

Final Thoughts: Think Long-Term, Think Discipline

For MSMEs, a good credit score isn’t just about getting a loan—it’s about building a trustworthy financial identity.

With a strong score, you gain:
✔ Faster approvals
✔ Better pricing
✔ Higher limits
✔ Access to unsecured loans
✔ Stronger banking relationships