Borrowing by small businesses: Why do directors need to have a strong credit profile?

For any business to thrive, especially MSMEs (Micro, Small, and Medium Enterprises), it is crucial to understand that what truly matters is who is at the helm of the business. Whether it’s the proprietor, a partner, or the directors, the individuals running the business play a significant role in determining not just its operational direction but also its financial credibility.

When looking at an organisation, particularly a small business, it becomes extremely important to measure the creditworthiness of these key individuals, commonly referred to as related parties. These parties, due to their close association with the business, directly impact the overall trust a financial institution places in the entity. Their credit behaviour can either strengthen or weaken the business’s profile in the eyes of a lender.

For any business to grow, it needs access to adequate funding. Whether the goal is to invest in new technology, expand operations, or upgrade infrastructure, financial resources are a must. However, many small businesses face a common challenge: high turnover but delayed payment terms. Even if the business appears profitable on paper, delays in receiving payments can affect day-to-day operations. In such cases, working capital becomes essential to maintain cash flow, pay suppliers, and keep operations running smoothly.

In these scenarios, lenders and banks evaluate the creditworthiness of the entity. But in many instances, especially when the business is new or has a limited credit history, the credit profile of the entity alone isn’t sufficient for making lending decisions. That’s when banks evaluate the credit history of related parties such as directors or proprietors.

Why personal credit matters when business credit is limited?

A director search is a very common due diligence step taken by lenders when issuing or renewing credit facilities. It helps determine whether the individuals associated with the business have a reliable track record. A strong personal credit profile can increase confidence among lenders, while a poor credit history can be a red flag.

To support this process, some credit bureaus now provide consolidated reports, which combine the credit history of the borrowing entity along with all its related parties. These consolidated reports make it easier for lending institutions to assess risk and make more informed decisions.

From the borrower’s perspective, both individuals and companies can access and monitor their credit reports. The credit report for individuals, known as the individual credit report, reflects the credit behaviour of the proprietor, partner, or director. The commercial credit report or company credit report provides a summary of the business entity’s credit standing. These reports are available on the websites of any of the four credit bureaus in India.

These credit reports include:

• A summary of all credit facilities availed
• Repayment behaviour over time
• Any recent or past credit-seeking enquiries

Regularly reviewing these reports helps businesses and individuals stay aware of their credit status and proactively correct any discrepancies.

How to strengthen your credit profile for better business borrowing?

To maintain good creditworthiness, financial discipline is essential. Some of the key practices include:

• Paying loans and EMIs on time
• Keeping utilisation of the approved credit limit to a minimum
• Avoiding unnecessary credit enquiries

These behaviours are strong indicators of responsible credit management. Over time, they reflect positively on the credit report, building trust with lenders and enhancing the chances of securing funding on favourable terms.

In summary, for any MSME to grow and sustain itself, the financial health of both the business and its key stakeholders must be monitored closely. A good credit history not only improves funding opportunities but also builds the overall credibility of the business in the financial ecosystem.

Disclaimer: The information provided in this article is for informational purposes only and does not constitute financial, legal, or professional advice. While every effort has been made to ensure accuracy, readers should verify details independently and consult relevant professionals before making financial decisions. The views expressed are based on current industry trends and regulatory frameworks, which may change over time. Neither the author nor the publisher is responsible for any decisions based on this content.

Ramkumar Gunasekaran, Director Sales, CRIF High Mark