Want to improve access to credit for your business? Here’s how to do it

The MSME sector forms the backbone of India’s economic growth and the government is supporting the resurgence of the MSME sector through various initiatives.  For instance, the Atmanirbhar Bharat initiative announcement provisioned for a 100 per cent credit guarantee on MSME loans through the ECLGS. Since its launch, the positive impact of ECLGS on MSME lending is evident. ECLGS support met its objective by providing much needed financial assistance to the MSME segments that were most vulnerable to the impact of the pandemic such as very small and micro businesses as well MSMEs operating in stressed sectors like trade, transport and hospitality. This timely financial infusion helped MSMEs to revive their businesses and enhance prospects for sustainable growth. In order to assess the impact of the Emergency Credit Line Guarantee Scheme (ECLGS), TransUnion CIBIL launched an ECLGS loan analysis study in December 2021 based on ECLGS 1.0 and 2.0 disbursals (made up to 31 March 2021). As part of this study, TransUnion CIBIL conducted a survey of MSMEs from across geographies. The survey findings indicate that 65 per cent of MSMEs believe that the ECLGS credit infusion has helped their business through financial troubles and 68 per cent were confident about a future positive outlook.  About 85 per cent of respondents also acknowledged that their company’s credit history and CIBIL Rank has played a critical role in facilitating ECLGS disbursals.

Lack of financial awareness is often cited as one of the key roadblocks for MSME development, which is a high priority segment for our country’s economic growth. In order to gain timely and better access to finance for business growth, MSMEs must gain knowledge on CIBIL Rank and commercial credit report. 

What is CIBIL Rank?

CIBIL Rank uses machine learning algorithms to predict the probability of an MSME becoming a Non-performing-asset (NPA) in the next 12 months. CIBIL Rank provides a rank to the MSME based on its credit history data on a scale of one to 10, CIBIL Rank-1 being the best possible rank for the least risky MSMEs and CIBIL Rank-10 being the riskiest rank for MSMEs. Banks and credit institutions assess a MSME’s CIBIL Rank and Commercial Credit Report prior to approving commercial loans. Some banks and credit institutions also offer CIBIL Rank based pricing on loans to MSMEs whereby an MSME with a better CIBIL Rank can avail lower rate of interest on the loan. 
How to build a better CIBIL Rank to avail faster and easier access to loans? 

It is critical for MSMEs to understand the significance of CIBIL Rank for getting easier and faster access to credit. MSMEs must actively take charge of their own credit health. Here’s what MSMEs can do to make sure that they are prepared to seek financial opportunities:

•    Irrespective of the size of your organization, it is always beneficial that you keep your company’s documentation ready, be it tax returns or credit statements. This is important because your company may face difficulty securing credit through formal channels due to the lack of organized financial records.
•    Improve your overall credit behavior and have a disciplined approach in yourorganization’s repayments as well as loan-taking patterns. You company can aim to have a CIBIL Rank below six and then work systematically towards boosting it to between one and four. This rank will reflect a healthy profile, enabling access to formal credit at a lower rate.
•    Your organization should have a cautious approach towards spending money and saving funds. When creating your business strategy, you should have a contingency fund that will provide necessary aid when required. You should also monitor government programs and identify the most cost-effective credit opportunities that may arise for your company. 
•    As an MSME owner, you must ensure that there are no over dues or delinquencies in your CIBIL Company Credit Report. You should contact your lender if any discrepancies occur. You can also reach out to TransUnion CIBIL in case of a dispute regarding the data in your report. Based on the type of the dispute, it will be taken up with the concerned bank/ financial institution. Please note that CIBIL can only make changes to your company credit report once the lending institutions submit the updated data.

In a nutshell, the availability of cost-effective and faster credit has always been a key enabler for MSMEs to achieve their business goals, and development plans. By taking a disciplined approach to credit building and monitoring; your business/organization can always be loan-ready. To move forward with the growth story, it is imperative for you as an MSME owner maintain healthy company credit record and prepare for faster access to credit.

Views are personal. The author is Senior Vice President and Head of the Direct to Consumer (DTC) Interactive division at TransUnion CIBIL.