How your credit score affects your business loan

For Filipino small and medium enterprises (SMEs), access to financing remains one of the biggest challenges when trying to grow their business. Everything costs money — from labor to day-to-day operations — and your working capital can quickly dry up with one cash flow gap or one delayed client payment. Financing sources, such as savings, credit lines, business loans or investors, can be the rescue, but each of them comes with its own set of risks and complexities before SMEs can get their funds.

One important factor that SMEs must consider when securing financing is their credit score. A credit score is a three-digit number that defines a person’s creditworthiness based on their past and ongoing financial behaviors. It is calculated using various factors, such as your credit history, total amount of credit owed, credit utilization, and the types of credit you have used. A high credit score is a sign of good financial health, unlocking easier access to financial opportunities, such as loans, credit lines, and favorable interest rates.

In other countries, such as the US, credit scores are used for almost everything involving credit — such as buying a smartphone or screening apartment renters. While the Philippines does not have a unified and widely used credit reporting system, all local credit scoring models used by banks, insurance companies, and other financial institutions are managed by a government-sanctioned credit organization called the Credit Information Corp. (CIC).

The CIC is the Philippines’ central repository of credit information. They collect and provide standardized credit information to banks and other financial institutions to assess a borrower’s potential risk. The CIC also oversees and accredits local credit bureaus, such as CIBI Information, Inc., CRIF Philippines, and TransUnion Philippines. These credit bureaus are authorized to access CIC’s credit data and provide standardized credit scores upon the request of financial institutions and individuals.

In the Philippines, credit scoring ranges from 300 to 850. A score of 650-850 is considered fair to excellent credit; a higher score suggests better financial standing and creditworthiness, which means you are likely to access credit and other financial services at favorable interest rates and terms. Anything lower than 650 is considered a poor credit score.

To know your credit score, you must obtain your credit report — a document that provides you with a detailed summary of your credit score, credit and payment history, and other important information that may influence your credit score, such as bank disputes and employment history. You can obtain your credit report in near-real time via the Lista PH app, which is partnered with the credit bureau CIBI Information, Inc. Just install the app, submit a valid ID, and pay P199 via e-wallet or debit/credit card.

So, how does your personal credit score impact future loan applications and other forms of credit? Since your credit score is a measure of your creditworthiness, a higher credit score signals to lenders that you manage debts well and have a history of paying back what you owe on time — thus making you a lower-risk borrower. Loan processing and approval becomes faster, and you are likely to obtain more favorable loan conditions, such as lower interest rates, higher borrowing limits, or longer repayment terms — especially if you also have a high annual income to match. Insurance providers rely on credit scores when setting premiums for your auto loan, home loan, or insurance; even government social services, such as SSS and Pag-IBIG, consider credit scores when approving and disbursing housing loans and salary loans.

So, what is the relationship between your personal credit score and business loan application? When you apply for a business loan, lenders assess the personal finances and credit history of its key owners and stakeholders. Credit scores reflect an individual’s ability to manage their finances, and lenders view them as an indicator of the stakeholders’ skill in handling company finances. From personal credit history, lenders also gauge if the company’s stakeholders are likely to assist in debt collection should the business default — either by liquidating business assets or using their personal assets.

Unpaid personal loans, penalties for late payments, and other markers of a negative loan history can increase your company’s risk profile — which, in turn, can lead to a higher interest rate or even a denial of your business loan application. Thus, it’s crucial for all company stakeholders to settle any personal loans on time and maintain a good credit score in order to demonstrate good financial skills and solid financial health.

So how do you build and maintain a good credit score? Aside from being responsible when it comes to your finances, be consistent in modeling good financial behavior. First, pay your bills, especially loan and credit dues, on time. If you can’t, negotiate for a loan rescheduling or loan restructuring with your lender to ease your monthly payments. You may end up with a higher final repayment for both options, but you’ll minimize the appearance of late repayments or penal-ties on your credit report.

Second, make it a habit to review your credit report regularly. If you find inaccuracies, such as incorrect account details and fraudulent activities, you can dispute these with the credit bureaus to have them corrected. Your credit score also refreshes every 30 days, so it’s a good idea to request a new report before applying for credit to gauge your likelihood of approval.

Third, use 30% or less of your available credit. This refers to your credit utilization ratio, which is the percentage of your total credit limit that you are using. Maintaining your credit use to 30% or less signals to lenders that you are not overly reliant on credit. Going beyond 30% or maxing out your credit card limit leads to a lower score because it suggests financial strain and a higher likelihood of missing future repayments.

While having multiple types of credit can be a good idea, applying for credit successively in a short period raises red flags and hurts your credit score. It implies that you are desperate for funds and unable to handle financial obligations responsibly. It is also ideal to settle previous debts before opening a new credit card or applying for a new loan; multiple debts signal to lenders that you are at a higher risk of missing repayments.

Having too little credit can also cause your credit score to stagnate. This is because you don’t have much credit history that can be used to assess your creditworthiness. To responsibly build your credit history, you can open an entry-level credit card with no annual fees for life, apply for a secured credit card, or request for a credit card limit increase. This reduces your credit utilization ratio and makes the amount you borrow seem smaller.

Lastly, focus on paying off any previous debts or delinquent credit accounts that are collecting interest or penalties. You can negotiate with creditors to reduce your monthly payments, or consolidate multiple debts with high interest rates into a single loan so you can pay less in penalties and interest rates.

By implementing these strategies, you can work towards building a stronger credit profile over time, enhancing your financial health and improving your ability to secure loans and credit on favorable terms.

Credit scores play an indispensable role in the financial landscape for Filipino business owners. By understanding and managing your credit score effectively, you can enhance your ability to secure business loans with favorable terms, thus supporting the growth and sustainability of your business in the competitive market.

This article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or MAP.

Benedict S. Carandang is a member of the MAP ICT Committee and the vice-president for External Relations of First Circle. This article is co-written with Jess Jacutan, First Circle’s content marketing lead.