Money is the lifeblood that fuels growth and innovation. Whether you run a small startup or a large corporation, having access to capital is crucial for day-to-day operations, launching new projects, investing in research and development, and expanding into new markets. However, many businesses often find themselves in need of external funding to achieve these goals. This is where business loans come into play.
The Importance of Business Loans
Business loans from banks and non-banking financial companies (NBFCs) can provide the necessary capital to help firms thrive. However, before approving a loan application, lenders assess the borrower’s creditworthiness. This assessment is vital for mitigating risks associated with lending money. A key component of this evaluation is the borrower’s credit score.
What is a Credit Score?
A credit score is a three-digit number that represents a business’s creditworthiness. It is derived from the company’s credit history and is a crucial factor for lenders in determining whether to approve a loan application. A higher credit score means that a business is more likely to repay its debts on time, while a lower score indicates a higher risk of default.
How is a Credit Score Calculated?
Credit scores are computed based on various factors, including:
- Repayment History: This is the most significant factor, accounting for 30% of the score. It reflects how consistently a business has made its loan repayments.
- Credit Exposure: This factor, which makes up 25% of the score, refers to the share of Credit used compared to the total credit limit available. A high credit utilization ratio may indicate financial distress.
- Type of Credit Availed: This accounts for another 25%. Businesses with a mix of secured and unsecured loans are viewed more favourably.
- Number of Hard Inquiries: This factor contributes 20% to the score and reflects how often lenders have checked the business’s credit report. Numerous inquiries in a short period can negatively impact the score.
Who Calculates Credit Scores?
In India, credit scores are calculated by independent credit bureaus. The four main credit bureaus approved by the Reserve Bank of India (RBI) are:
- TransUnion Credit Information Bureau (India) Limited (CIBIL)
- Equifax
- CRIF Highmark
- Experian
CIBIL is India’s most widely used bureau, and many banks and NBFCs rely on its credit scores to make lending decisions.
Why Lenders Review Credit Scores
Lenders review credit scores to assess the risk of lending to a business. A higher credit score indicates a lower default risk, making lenders more likely to approve the loan. Conversely, a lower score may lead to loan denial or higher interest rates due to sensed danger.
Key Questions Lenders Ask:
- How many loans have the business availed in the past?
- What types of Credit has the business accessed?
- Has the business made timely payments?
- Were there any delays or missed repayments?
- What is the length of the business’s credit history?
Understanding Credit Scores and Reports
Credit Reports
A Credit Report (CCR) provides a detailed overview of a company’s financial health. It includes information such as:
- The company’s name and shareholder details
- Years in operation
- Parent and subsidiary companies
- Credit institutions that have previously granted loans
- Types of loans availed
- Financial and revenue generation history
Credit Score Ranges
CIBIL scores vary from 300 to 900, with higher scores indicating better creditworthiness. Here’s a breakdown of what different score ranges mean:
CIBIL Score Range Table
|
CIBIL Score Range |
Indicates | Probability of Loan Approval | Notes |
|
750-900 |
Very low-risk | Highly likely |
Most lenders will sanction loans. |
|
700-750 |
Low-medium-risk | Fairly likely |
Some additional analysis may be required. |
|
650-700 |
Medium-risk | Somewhat likely |
High interest rates may apply. |
|
Less than 650 |
High-risk | Very unlikely |
Tough terms and conditions may apply. |
Business Credit Score vs Personal Credit Score
Understanding that business and personal credit scores are calculated separately is essential. A business credit score is based on the company’s credit history, while a personal credit score reflects an individual’s ability to repay personal debts. However, in many cases, especially for sole proprietorships, the business owner’s Credit can be affected by the business’s financial behaviour.
How to Improve Your Credit Score
Improving your credit score is vital for securing favourable loan terms. Here are some actionable steps:
- Make Timely Repayments: Ensure that all loan repayments are made on time.
- Use Credit Responsibly: Avoid overextending your credit limits.
- Maintain a Low Credit Utilization Ratio: Aim to use less than 30% of your available Credit.
- Diversify Your Credit Mix: Include secured and unsecured loans in your credit profile.
- Limit Hard Inquiries: Avoid applying for multiple loans simultaneously to minimize hard inquiries.
How to Get Your CIBIL Score and CCR
Before applying for a loan, you should inspect your credit score and CCR. Here’s how to do it:
- Visit the CIBIL website: CIBIL
- Create an account by filling out the required details.
- Confirm your identity using an OTP sent to your mobile.
- Access your credit score and CCR through the dashboard.
Costs Associated with CIBIL Reports
- One-time evaluation: ₹3,000 (includes a weekly refresh for one month)
- Standard package: ₹6,000 (6-month access)
- Yearly package: ₹12,000 (weekly refresh for a year)
Ready to Apply for a Business Loan?
To secure a business loan, consider connecting with multiple lenders through digital platforms like Cashntech. This platform allows you to explore various loan options tailored to your specific needs, including working capital loans and MSME loans. You can find the right lender for your business with a few clicks.
Final Words
Understanding credit scores is vital for any business owner seeking loans in India. By maintaining a good credit score and being aware of how creditworthiness is assessed, businesses can enhance their possibilities of securing the necessary funding to thrive. Remember, a well-managed credit profile opens doors to financial opportunities and sets the foundation for long-term business success.
Frequently Asked Questions (FAQs)
1 What is a good credit score for business loans in India?
A CIBIL score above 750 is typically considered suitable for business loans, indicating low risk to lenders.
2 How can I check my business credit score?
You can check your business credit score by visiting the CIBIL website and creating an account to access your CCR.
3 How long does it take to improve my credit score?
Improving your credit score can take several months, depending on your financial habits and repayment history.
4 Can a low credit score affect my business loan application?
A low credit score can lead to loan denial or higher interest rates due to perceived risk.
5 Do personal credit scores impact business loans?
Yes, in cases where the business owner provides a personal guarantee, personal credit scores can affect the business loan application.
CA Mohit Dhand specializes in delivering strategic risk assurance, consulting, and fintech solutions, empowering organizations to achieve sustainable success. With a strong background in finance and technology, Mohit is passionate about guiding businesses through complex challenges, ensuring growth and innovation.
