Every business knows this fact: it takes money to make money. All for-profit companies need funds to operate, pay their employees and suppliers, and explore growth opportunities. In India, lenders like banks and non-banking financial companies (NBFCs) willingly extend loans to business borrowers. But first, they assess the borrower’s creditworthiness by checking their credit score.
A credit score is a numerical company credit report (CCR) figure. The CCR is prepared by a credit bureau approved by the Reserve Bank of India (RBI), such as TransUnion Credit Information Bureau India Limited (CIBIL), Equifax, or CRIF HighMark.
If you are a business owner applying for a business loan, you should aim to maximise your credit score. This article will tell you why and how.
How Your Credit Score Can Impact Your Probability of Getting a Business Loan
When banks and NBFCs lend funds, they want to maximise the chances of recovering the original principal plus the mutually agreed-upon interest payments. They want to avoid situations where a loan becomes a bad loan (also known as a non-performing asset or NPA) because NPAs negatively impact their profitability and capital levels. To minimise the possibility of adding NPAs to their books, they try to understand their risk in lending to companies. And for this, they rely on credit scores.
A company’s credit score impacts its ability to qualify for a loan and get it on competitive terms. This is because it indicates to a lender that the borrower is creditworthy and, therefore, likely to repay their loan. Since the borrower is less likely to default on the loan, the lender’s risk is low. As a result, they are more likely to sanction the business loan for the company.
Factors that Impact Your Credit Score
Your credit score is a reflection of your credit history, which in turn depends on multiple aspects, such as the number of bank accounts you hold and operate, your existing debt levels, types of loans availed in the past, and how and when you made repayments on past loans. Thus, if you are a borrower with a documented history of late or missed repayments, your credit score will go down, and so will your chances of getting a new business loan.
CIBIL and other bureaux will also look into your history of financial responsibility and management. If they find that you have been irresponsible or mismanaged your company’s cashflows, working capital, or revenues, your score will go down.
Other factors that determine your credit score on your CCR include:
|Factors that impact credit score
|Total debt balance
|If you are making progress in paying off your existing debt, your credit score will go up.
|Credit utilisation (percentage of available credit limit used)
|Lower credit utilisation increases the credit score.
|Fewer inquiries increase the credit score.
|Length of credit history
|A longer credit history increases the credit score.
|Holding a diverse portfolio of credit generally increases the credit score.
On the other hand, using too much available credit, applying for a lot of credit in a short time period, and defaulting on credit accounts due to bankruptcy, foreclosures, or repossessions can all hurt your credit score and lower your chances of getting a business loan.
Ideal CIBIL Score for a Business Loan
Most Indian banks and NBFCs use the credit scores issued by CIBIL (CIBIL score) to assess borrower creditworthiness and finalise their loan sanction decisions. Banks usually ask for a CIBIL score above 700 to grant unsecured business loans. For secured loans, a credit score of 600 – 700 is acceptable to many lenders. As long as your credit score falls into the bank’s desirable bracket, you have some negotiating power with the bank in terms of interest rates, sanctioned amounts, and tenure.
Whether you apply for a secured or unsecured business loan, lenders usually ask for both the borrower’s business credit score and personal credit score, especially if the borrower is applying for a business loan on behalf of a private limited company, closely-held limited company, limited liability partnership (LLP), or a partnership company.
You may be able to get a business loan if your credit score is lower than 600. However, you may be unable to negotiate a good deal regarding interest rates and tenure. In this case, you have two options:
- Apply for the loan and accept the somewhat-undesirable terms
- Boost your credit score and apply for the loan at a later date when you are more likely to secure favourable terms
Types of Business Loans Based on CIBIL Score
As an Indian business, you can apply for many types of business loans which provide financing either as a credit line or a lump sum payment. The table below shows the CIBIL score most lenders ask for to sanction various business loans.
|Required CIBIL Score*
|Working capital loan
|To finance day-to-day operations and smooth over cashflow problems
|650 or above
|For a specific purpose, such as to finance a capital expenditure
|750 or above
|Business credit card
|To track business expenses and keep them separate from personal expenses
|640 or above
|To ease working capital fluctuations and meet unexpected expenditures
|700 or above
|To fund the purchase of new machinery or the reparation/upgrade of existing machinery
|750 or above
|Loan against property (LAP)
|To meet various business expenses
|750 or above
*Indicative values only; actual values differ by lenders
5 Ways to Improve Your Business CIBIL Score
You want to improve your CIBIL credit score to improve your chances of getting a business loan. How long will it take? The right answer: there is no right answer!
The time required to rebuild credit scores varies on a case-by-case basis so there’s no “average” period. Thus, if you are looking to improve your score from say, 500 (below average) to 750 (good), you may require six months or you may require a year. If your score is already high (750+), you may be able to improve it further in even less time.
Regardless of what your current score is, you can improve it by following these best practices:
Repay all outstanding debt
Unpaid debt will drag down your CIBIL score. Even a single missed repayment will affect your credit history and, ultimately, your credit score. If you plan to apply for a new loan and want to boost your credit score, first repay all outstanding debt. If this is not possible, at least consolidate it into a single payment, making it easier to repay the debt and boost your CIBIL score.
Reduce your Credit Utilisation Ratio (CUR)
CUR is a percentage measure of the available credit you currently use. A CUR of 90-100% can impact your credit score negatively. Try to reduce it to 60-70%. If possible, bring it down to 30-40%. The lower your CUR, the higher your CIBIL score will go.
Be judicious about loan applications
You may be applying for a business loan that you don’t need, and that will bring your CIBIL score down. For instance, do you need a loan to buy office space or new machinery? Renting or leasing may satisfy your requirements. Plus, you can pay for these expenses with your working capital without increasing your debt burden.
You should also avoid applying for multiple credit products simultaneously (working capital loan + machinery loan + business credit card, etc.). Too many credit applications indicate a credit-hungry borrower, which credit bureaux label as high-risk and low-score.
Keep old credit lines open
A long credit history will have a good impact on your credit score. Try to maintain a long credit relationship with banks and don’t close old credit limits. Instead, keep the lines of credit open to demonstrate responsible financial management.
Over-leveraging means that a business has a higher debt compared to its operating cashflows and income. Banks are leery of lending to over-leveraged businesses due to the high risk of default. To avoid your loan applications from being rejected, maintain a healthy buffer between your debt and income. If your income is falling, avoid taking on more debt.
In addition to these five strategies, ensure you regularly monitor your company credit report. Knowing where you currently stand can help you figure out how to boost your score.
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