Regardless of industry or size, every company is in business to make money. But to make money, companies first need money. Money is essential to run day-to-day operations, initiate new projects, invest in R&D, develop new lines of business, expand into new markets, and compete successfully with other businesses. Sometimes, a firm may need money simply to stay afloat and avoid obsolescence.
To meet these objectives, many firms use their cashflows or plug their profits into the business. But more often than not, they realise that receiving capital from external sources, such as banks would make more financial and economic sense. Banks and non-banking financial companies (NBFCs) can provide funding through business loans, MSME loans, lines of credit, etc.
But before they approve a prospective borrower’s credit application and disburse the loan amount, they first assess their creditworthiness. Creditworthiness assessment is a critical risk mitigation strategy for lenders. It indicates the extent to which the bank or NBFC considers a company “suitable” to receive financial credit. A suitable borrower is one whose risk of default is low, and the probability of timely repayments is high.
Lenders often judge this suitability based on the borrower’s repayment history, their current financial situation in terms of revenues, cashflows, and profits, and most importantly, their credit score.
- What is a credit score?
- How is it calculated?
- Who calculates it?
Here’s everything you wanted to know about credit scores for business loans in India!
Credit Scores and Credit Score Bureaus in India
For business borrowers, a credit score is a number on their company credit report (CCR), indicating their creditworthiness. It is based on their credit history, which incorporates numerous aspects, including the types of credit availed, number of accounts held, total debt, and repayment history.
A CCR is a document detailing a company’s financial health as assessed by an independent credit institution. It includes the firm’s name, shareholder/partner details, years in operation, plus information like
- The company’s parent and subsidiary companies
- Credit institutions that have granted loans to the company in the past
- The type of loans availed by the company
- The credit facilities guaranteed by the company
- The company’s financial and revenue generation history
Lenders use credit scores and CCRs to evaluate the probability that the business will repay loans on time (desirable) and to calculate the likelihood that the loan could turn sour (undesirable).
Credit scores and credit reports are always prepared by independent credit agencies or “bureaus”. In India, there are four main credit bureaus approved by the Reserve Bank of India (RBI):
- TransUnion Credit Information Bureau (India) Limited (CIBIL)
- CRIF HighMark
A majority of Indian banks and NBFCs use the credit scores issued by CIBIL – also known as “CIBIL scores” – to assess potential borrowers’ creditworthiness and make credit disbursal decisions. This is simply because CIBIL is the oldest and, therefore the most well-known and most trusted bureau in India. However, some lenders also use the credit scores issued by Experian and Equifax for credit-related decision-making.
Why Lenders Review Borrowers’ Credit Scores Before Making Lending Decisions
A credit score is a good proxy for determining the lender’s risk in terms of a borrower’s repayment capability and reliability. A higher credit score means that the borrower is more creditworthy, which means that they are more likely to repay a loan. In other words, they are less likely to default, so the bank’s risk of loss is low.
A lower score indicates a high-risk borrower. These borrowers usually have a history of late or missed repayments or a reputation for financial irresponsibility. Lenders don’t see them in a positive light and usually refuse to extend credit to them.
In general, lenders review a firm’s CIBIL score because it can answer all these questions for them:
- How many loans have they availed in the past?
- What types of loans/credit did they avail?
- Did they make payments on time?
- Were there delays? To what extent?
- Did they miss any repayments?
- Did they default on any loan?
- What is the length of their credit history?
How Credit Scores Are Calculated for Business Borrowers in India
An Indian business borrower’s CIBIL score is calculated based on a number of important factors, each of which is given a particular weightage. These factors are:
- Repayment history (High impact)
- Credit exposure (High impact)
- Type of credit availed (Medium impact)
- Number of hard inquiries (Low impact)
The maximum weightage of 30% is given to repayment history. This is because this factor is considered the best predictor of a borrower’s likelihood to repay a future loan. Needless to say, businesses that have a history of timely repayment are more likely to get a higher score on this factor.
Credit exposure carries a weightage of 25% in the calculation. Also known as credit utilisation ratio refers to the amount of credit used by the borrower in proportion to the credit limit available to them. A higher utilisation indicates that they are credit-hungry and could default on future loans, making them less creditworthy in the eyes of CIBIL and lenders.
The type of credit availed also accounts for 25% of a borrower’s CIBIL score. Borrowers with a long credit history and both secured and unsecured credit in the CCR are considered more trustworthy and creditworthy by CIBIL.
Whenever a company applies for a business loan or another credit, the bank or NBFC requests the borrower’s CCR and CIBIL score. These requests, which are known as “hard enquiries” can negatively impact the company’s CIBIL score. Hard inquiries are given a weightage of 20% in CIBIL score calculations.
Breakdown of Credit Scores: What is a “Good” Credit Score for Business Borrowers?
A CIBIL credit score is a three-digit number ranging from 300 and 900. The higher the score, the more creditworthy the borrower is considered and the more likely that their loan application will be approved.
Generally, banks and NBFCs prefer CIBIL scores above 750 to approve loan applications and disburse credit. The table below shows how CIBIL scores map to a borrower’s creditworthiness and how they impact lenders’ credit decision-making:
|CIBIL Score Range||What it indicates about the borrower||Probability of loan approval||Important to remember|
|Less than 650||
||Very unlikely||Some banks may approve a loan with any of these conditions:
In addition to providing a credit score, CIBIL also provides a CIBIL Rank, which is a single number ranging from 1 to 10. It summarises a company’s CCR. The closer the rank is to 1, the better the borrower’s credit health and the more likely they are to get a business or MSME loan. A ranking above 4 is undesirable since it indicates a low probability of loan approval.
Business Credit Score vs Personal Credit Score
CIBIL calculates business and personal credit scores separately. A business CIBIL score is calculated based on the company’s credit history, repayment history, historical repayment reliability, and existing financial commitments. The goal is to help potential lenders assess their risk in offering credit to that business. A personal CIBIL score measures an individual’s ability to repay their debt. It is calculated based on the number of credit lines a borrower has availed for their personal needs.
A business owner can have both personal and business CIBIL scores. But if the company and the owner are legally separate entities, the company’s debts will not affect the owner’s CIBIL score and vice versa. That said, a vast majority of MSMEs in India are owned by sole proprietors and partners who provide a personal guarantee for the company’s loans. In these cases, repayment delays and defaults on the business loan will affect both the owner’s personal CIBIL score and the company’s CIBIL score and CIBIL Rank.
As a business owner and borrower, you should be aware of both your CIBIL score and CIBIL Rank. The latter is similar to an individual’s credit score and is a crucial predictor of your loan eligibility and sanction.
How to Get Your CIBIL Score and CCR Before Applying for a Bank Loan
It’s generally good practice for companies to check and track their own CIBIL scores and get a CCR before applying for credit with a bank or NBFC. Knowing your credit score is the first step to improving it, which you can do by:
- Making timely loan repayments
- Using credit responsibly
- Maintaining a low credit utilisation ratio
- Maintaining a good credit mix (secured and unsecured)
- Avoiding availing multiple credit facilities at the same time
If you plan to apply for a bank loan, line of credit, business credit card, etc., first check your personal CIBIL score on CIBIL’s official website: https://www.cibil.com/. Follow these steps:
- Create an account on the website
- Fill out the online form with details like your name, ID type and number, pin code, and mobile number
- Once you click on accept and continue, you will receive an OTP on your mobile
- Type in the OTP and click on Continue
- Select Go to Dashboard and check your credit score
- You will be redirected to myscore.cibil.com
- Click on Member Login and enter your login details
- Once you log in successfully, you can see your CIBIL score
You can also request your CCR from CIBIL. Go here: https://www.cibil.com/cibilrank. Keep in mind that the CCR is not free. If you require a one-time evaluation of your score, the cost is Rs.3,000. For this amount, you can get a weekly refresh of your CIBIL Rank and CCR for 1 month. You can stay updated on your company’s credit history for 6 months by purchasing the standard CIBIL Rank/CCR package for Rs.6,000. The yearly package costs Rs.12,000 and will give you a weekly refresh of your CIBIL Rank and CCR.
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