How Much CIBIL Score is Required For Business Loans?
Lenders give loan on the basis of the past credit history of the owner. Read on to know the minimum cibil score required for business loan!
Fortunes of a business venture are intrinsically linked to its owner. This correlation diminishes as a company grows big and the founder takes a back seat with other professionals running the day-to-day affairs. But when the business is in its early stage of development, the owners are not just the drivers of operations but also a determinant of the future growth.This is because any business requires capital resources, which can come via two forms: equity or debt. It is advisable to take on debt to manage the financial affairs even if the business has the option to tap into new or existing shareholders for additional equity.
The debt or business loan can be availed through collateral-backed borrowing or an unsecured loan. In case of the former, the business owner needs to pledge some asset as a security to assure the lender that in case of default it has some recourse to recover a part, if not the full amount, of the loan.On the flip side, an unsecured business loan does not require any such pledge of an asset. But this also means lenders take a bigger risk in advancing a collateral-free business loan. They try to mitigate part of the risk by restricting the amount of loan and charging a higher interest rate.
Typically, such loans can be availed only up to Rs 50 lakh, though some lenders have an even lower threshold.With no collateral at play, lenders tend to bank on other factors to decide whether or not to advance a business loan. One of the key considerations for them is the past credit history of the business owner. This is captured via a credit score.
What’s The ScoreCredit score is a three-digit number assigned by independent agencies that specialise in credit assessment. TransUnion CIBIL is one such agency and given that the first credit score in the country was created by CIBIL, it has become synonymous with credit scoring even though there are a few other agencies.
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The number varies between 300 and 900. The closer the number is to 900, the rosier the picture of credit history and as a result those are the preferred clients or borrowers for financial institutions such as banks or non-banking finance companies (NBFCs). At the same time, the closer this number is to the lower bound, the worse it is in terms of credit score.Banks use this as a first filter to assess the borrower’s loan application. This is even true if one is taking a small business loan.
What’s The Minimum CIBIL Score NeededNotably, what is a good score and at what level a lender would not touch a borrower varies. In general, however, 750 is seen as a cut-off for a good credit score for most lenders. This means if the business owner’s credit score is 750 or above he or she has a good chance of getting their small business loan approved and that too at a low interest rate.
This is because the lenders see such borrowers as having a good credit history with repayments on time and manageable outstanding debt, if any.But a credit score that is lower than 750 doesn’t mean it disqualifies an entrepreneur from availing a small business loan. While banks tend to have stricter policies and may not advance an unsecured business loan if the owner’s score is less than 750, many NBFCs are more flexible in their underwriting process and, based on other factors, may well provide a loan even with a credit score of say 600 or 650, after adding a mark-up or charging a bit more in terms of interest rate. This is to make up for the additional risk.
Businesspersons need to understand that to grow their enterprise they would need to go for a loan at some point and they have the option of taking a collateral-free loan. However, those loans are based on the lender’s perception of the business as also the owner’s past credit behaviour. In simple terms, they base their decision of advancing a small business loan on the credit score of the entrepreneur. While 750 is seen as a universal cut-off for availing a small unsecured business loan, some lenders do accept borrowers with lower scores, depending on other factors.IIFL Finance provides collateral-free small business loans of as much as Rs 30 lakh for up to five years at low interest rates to entrepreneurs to meet their requirements, via a seamless process.
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