What Is A Good Credit Score Needed For Getting A Business Loan?
The higher the credit score, the better are the chances of qualifying for business loans. But what is the minimum good credit score required? Read to know here!
Businesses require an infusion of capital for the smooth running of their day-to-day operations and to expand their presence in the marketplace. While many businesses use their cash flows and profit to stay afloat or grow their operations, there are times when business owners and entrepreneurs have to raise additional funds in the form of business loans or MSME loans to sustain themselves.
A key parameter that banks and non-banking finance companies use before approving any loan is the creditworthiness of the prospective borrower. How do the lenders assess creditworthiness? Well, it depends on the revenue, cash flow and profits of the business entity. Most lenders also use credit scores to assess how likely the borrower will adhere to the repayment plan and whether the loan could turn sour.
Credit Scores And Their Importance
The credit score—also known as the CIBIL score after Credit Information Bureau India Ltd (CIBIL), which popularized the concept in the country—is a measurement of financial responsibility. It gives the lenders an idea about the borrower’s repayment capacity. While lenders often use credit scores to decide whether to sanction a loan, they also may use these scores to customise the loan for a borrower and decide on interest rates and other repayment terms.
The credit score ranges from 300 to 900. A higher credit score means a lower risk of default and thereby a lower interest rate, and vice versa. A score of 700-900 is usually considered a good score.
To be sure, the lenders may also add more parameters to determine if they should even grant a loan to a borrower with a low credit score. These credit scores are important for most types of loans and not just business loans.
Who Calculates The Credit Scores?
In India, the major credit information bureaus that track credit scores are Equifax, TransUnion CIBIL, CRIF Highmark and Experian.
Personal And Business Credit Score
A personal credit score is a measurement of an individual's ability to pay back his or her own debt. On the other hand, a business credit score is a measurement of the ability of the business to meet its own financial expenses.
For business owners, it is necessary to separate personal finances from business funds, though most banks and NBFCs keep track of both personal credit score and business credit score while funding.
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Business debts do not impact the personal credit score when the company and the owner are legally separate entities. But most small business owners, especially sole proprietors and partners, personally guarantee their loans. In such cases, a default can affect the owner’s personal credit score as well as the business score.
A breakdown of the credit score to qualify for the amount of credit a borrower is likely to get is as follows:
Credit Score Of 750 And Above:
A credit score of 750 and above is excellent for qualifying for the MSME loan criteria. Businesses with a score of 750 and more usually make their payments on loans, credit cards, rental and other utilities on time. Lenders identify such borrowers as “financially responsible borrowers”.
A high credit score increases the eligibility for business loans from traditional banks. Furthermore, it opens avenues to get the lowest available annual percentage rate within the already modest range of MSME loan criteria.
Credit Score Of 650 To 749:
Most lenders consider a credit score of at least 680 for a business to be eligible for a loan. Scores above 700, though not excellent, are good enough to secure credit, but not with the best interest rate.
Borrowers who fall on the other side of this gamut are considered ineligible for the MSME loan criteria. If loans are not of utmost necessity, then the best way to fix it is to improve the credit score. It can be done by settling the outstanding bills and improving the credit utilisation.
However, borrowers with an urgent need for cash should look for alternative lending solutions like machinery financing or a working capital loan.
Credit Score Of 650 And Less:
Borrowers with a credit score of 650 and less may have to satisfy the lenders of their ability to repay the loan with other documentary evidence. Even if lenders grant a loan to such borrowers, they may sanction a lower amount or impose tougher repayment terms. For some borrowers proof of long-established business or stable cash flows may be helpful. Still, they may be identified as high-risk consumers by the lenders.
A perfect credit score may be difficult to get, but it is attainable. For small businesses that need term loans, short-term loans and MSME loans, a good credit score is essential.
Individuals with no credit history may have low credit scores. Approaching a local lender with a first-time borrowing requirement and over time developing a responsible repayment pattern can help build a good credit score.
Support from a well-established financial institution like IIFL Finance can help business owners to address their challenges. To help small business owners, IIFL Finance offers different business loans at affordable rates.
Borrowers not sure of their credit score can generate their credit report from IIFL Finance’s website to find out their score for free.
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