Steps Towards Building a Good Credit History
Credit History is one of the prime parameters considered by Banks/lenders while forming a view on their relationship with a Company .
Its usage is not restricted only to lenders; suppliers of goods and services rely on this parameter to determine maximum outstanding extended to their debtors for supplies. Credit Bureaus rely on the Credit history to rate companies and individuals.
Credit History of a Company is its financial behaviour, which is reflective of the financial discipline followed by it.
Building a good credit history with creditors is not a short-term measure; it is embedded in ethos of the Company. It requires an ongoing effort towards financial planning and practising financial discipline.
Building an acceptable level of credit history with lenders is more than retiring debt on due dates; several measures are required to strengthen credit history with lenders, some of these include:
1. Meeting due dates of all borrowings:
Company should strictly meet the due date of repayments of all their borrowings i.e., term loan instalments, repayment of working capital commitments, servicing of interest, meeting trade related dues, etc.
2. Financial Covenants to be within prescribed levels:
Lenders often prescribe financial covenants that provide the framework based on which the facilities were extended to companies. Nonadherence to the pre-set levels of financial covenants is seen as a deviation by the lenders. Lenders like to see a cure for such situation and look for an early normalcy of the financial covenant.
3. Maintenance of Security Package:
Security package is one of the main drivers for the facilities; maintenance of lenders security interest and preservation of the value of security is important to lenders.
4. Other Conditions of approval to be adhered:
Usually, the terms of the approval of facilities have other conditions for the approval. It’s important for lenders that all the terms of the approval are well preserved and maintained by the company.
5. Timely submission of financial statements:
Submission of financial statements facilitate the Banks to update their view on the credit standing of the Company. It helps the lenders to consider steps to preserve their commitment in case of significant deterioration in Company’s financial performance.
6. Periodic submission of reports:
Certain report i.e., valuation reports, progress reports, industry reports, etc. are required on a periodic basis.
7. Maintenance of bank outstanding’s within limits:
Companies should keep a head room in the utilisation of their working capital facilities, which reflects on their standing with lenders and prepares them to meet any situation.
8. Routing revenue on a regular basis:
Banks would like to see routing of a fair share of revenue thru their counters, which is also an indication to evidence the business volume and activity.
9. Transactions backed by genuine trade:
Lender’s finance genuine business transactions only.
10. Periodic meetings with Banks/lenders
Meetings with Banks provide setting to discuss any open points in the relationship. Meetings should be encouraged at all levels i.e., senior, middle, and operational level.