A business requires an inflow of capital and funds from time to time for working capital, operating expenses, buying equipment and machines, and expanding the business.
The requirements can be fulfilled by getting business loans from banks, financial institutions, NBFCs, and open markets.
However, getting the business loan is not very easy, the business has to be eligible based on various criteria such as the annual turnover, income tax return, banking, credit history, out of which the most important criteria are the credit history of the business that is being determined by the CIBIL score.
In this blog, we will get to know about the importance of cibil score for business loan.
What is a Credit Score?
A credit score is a number accredited to the business, based on the study of their credit history that includes their business credit card usage, bank accounts held & closed, payment history and the credit enquires done by the business.
Where Can the Businesses Check their Credit Score?
There are credit bureaus licensed by RBI, that provides credit scores in India. The popular bureaus are Equifax, Highmark, Experian that assigns the credit score.
What is a Good Credit Score?
The credit score popularly known as CIBIL ranges between 300 and 900, where 900 is the best score and 300 is the poor score. This can be explained with the credit score range as shown below:
0 or -1
|350 – 550||550 – 650||650-750||
750 – 900
|In case there is no loan or credit card then no credit history is created and the score will be zero.||Considered to be a bad score. This is caused by the regular defaults in the payment and as a result, the chances of getting the credit is low.||This range signifies that the businesses are regular with their payments. Hence, there are chances of getting fresh loans and credit cards.||This range is the safe zone and there is a high possibility of getting a loan based on current payment habits.||This is the best range and the applicant sure-shot gets the loan based on good credit history.|
Why is It Important to Have A Good Credit Score?
- It is a mandate for the majority of the financial institution to have a look at the borrower’s credit score before deciding to provide a loan or credit card.
- It can be also asked by the companies from where a person is availing services such as l utility organization, service industries, etc.
- Credit score can also be asked by the prospective employer as a part of the background verification procedure before offering a job.
- A good credit score helps the borrower to get the loan at a cheaper rate of interest.
- In a few cases, Bank checks the credit score before opening the bank account
How to Avail of A Loan if a Person Has A Bad Credit Score?
The cause for the bad credit score is missing out on credit card dues, defaulting of the Loan EMIs repayment, which reduces the chances for the borrower to get a business loan. Albeit there is still a solution to tackle this issue which are:
Line of Credit Option
It is easier to get a business credit card than applying for a loan, as per the past payment record the credit limit is being decided but the credit is majorly received at a higher rate of interest.
Majorly banks do not provide business loans to individuals with a bad credit score. However, in certain exceptional cases, it might provide a business loan at a higher rate of interest.
Such a scenario is can be explained with an example, if you have a fixed deposit in a certain bank then the bank can provide you a loan against the amount deposited as a fixed deposit.
Non-Banking Financial Corporations
Popularly called NBFC, the criteria for a credit score is not very stringent for the borrowers to avail of a business loan. As the majority of them provide an unsecured loan, hence the rate of interest charged is high and the borrowers can borrow a higher loan amount.
One of the popular NBFC, ZipLoan can provide unsecured business loan up to 7.5 lakhs, at a very competitive interest rate even at the lower credit score if the business suffices other parameters.
Loans with Security
Persons can avail of a business loan in a bad credit situation if they have assets such as a house or business property, machinery, equipment, etc that they can mortgage with the banks. Such loans are also available at a lower rate of interest.
Loan on Future Revenue
The agreement is made between the borrower and the financial institution where the business loan amount is provided as expected by the borrower and a certain percentage of the monthly revenue is being deducted and paid as an EMI till the full amount is being paid. There is a condition that the loan cannot exceed more than 10% of the company’s total revenue.
Loans for Small Scale Companies
These type of loans help the budding small scale startups to acquire loans from non-profit organizations. The loans are provided at a decent rate for a good tenure.
In case, the borrower has a bad credit score, he/she should start improving the score so that he/she becomes eligible to get a desired business loan amount
What Are the Ways to Maintain the Credit Score?
- Use a credit card but limit yourself to 40% of the credit limit.
- Repay the credit card dues and EMIs on time.
- Control enquires and application for the new loans or new card.
- Continue using an old credit card, the closing of the card will reduce the credit score from a few points.
- Existing debt to be managed – Too much debt can impact your credit score.
Maintaining a good credit score health, result in getting a higher amount of business loan that will serve the purpose for which the business loan is being taken. So it becomes imperative for businesses to improve their credit score to get a business loan from different sources.