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Starting and operating a successful business requires careful planning, dedication, hard work, and the ability to take risks. In addition, entrepreneurs also need access to significant capital to grow their businesses. In many cases, they apply for a business loan to secure the necessary funds. And one of the most critical factors that lenders consider while approving business loans is your credit score.
A credit score is a numerical representation of your creditworthiness and is based on your credit history, payment behaviour, and other financial factors. Lenders use this information to assess the level of risk involved in lending to you and to determine the interest rate and terms of your loan.
In this article, we will explore the minimum credit score requirements for business loans and provide you with some tips on how to improve your credit score to increase your chances of qualifying for a loan. Before that, let us help you quickly understand the meaning of credit score.
What is a credit score?
It is a numerical representation of an individual’s creditworthiness, that depends on their credit history and other financial factors. Apart from this, it is a three-digit number that ranges from 300 to 900, with higher scores indicating better creditworthiness.
A higher credit score (650 and above) indicates that the borrower is more likely to repay the loan on time, while a lower score indicates a higher risk of default.
What is the minimum CIBIL score required for a business loan?
Oftentimes, entrepreneurs apply for business loans to secure funds for business expansion. However, apart from checking the credit history of the company, lenders also assess the CIBIL score of the company owner before approving the loan application. The CIBIL score ranges between 300 and 900, with a higher score indicating better creditworthiness. Typically, a credit score of 750 or above is considered good and is usually sufficient for loan approval.
Note- While the CIBIL score is an important factor in loan approval, other factors such as Corporate Credit Rating (CCR), amount of capital invested, and business plan also play a significant role. Depending on these factors, lenders may still offer a loan even with a lower CIBIL score. However, it’s extremely difficult to secure a business loan for a company with a CIBIL score below 650.
Importance of CIBIL score for a business loan
When applying for a business loan, the lender assesses not only the Corporate Credit Rating (CCR) of the business but also the creditworthiness of the individual owner using their CIBIL score. As a result, entrepreneurs must maintain a good credit history to increase the chances of loan approval.
Additionally, the CIBIL score, which ranges from 300 to 900, indicates an individual’s creditworthiness. It’s calculated by TransUnion CIBIL, the most reliable credit bureau in the country, based on credit history, including repayment record, credit utilisation ratio, and the number of active and closed loan accounts.
Why your credit score is critical to securing a business loan?
Your CIBIL score plays a crucial role in determining whether your business loan application gets approved. The chances of approval of your loan application is directly proportional to your CIBIL score. Let’s have a closer look at how the probability of loan approval varies with your CIBIL score:
- 800 or above- Very likely
- 750 – 800- Fairly likely
- 650 – 750- Can be approved depending upon other factors
- Less than 650- Very unlikely
Tips to improve your CIBIL score before applying for a business loan
To enhance your chances of getting approved for a business loan, it’s essential to have a good CIBIL score. You can achieve this by developing positive financial habits. Here are some key practices that can help improve your CIBIL score:
- Make timely payments: Paying your loan EMIs and credit card bills on time is the most important financial habit to cultivate for a healthy CIBIL score.
- Check your credit report regularly: You must keep track of your active and closed loan accounts and review your credit report regularly. If you notice any errors or discrepancies, report them to CIBIL immediately.
- Avoid too many loan/credit card applications: Applying for a loan or credit card results in a hard inquiry on your credit report, which can negatively impact your CIBIL score. Therefore, it’s best to limit the number of loan or credit card applications.
- Keep credit utilisation low: It’s recommended to use no more than 30% of your credit card limit. As exhausting your credit limit shows poor financial behaviour and can lower your CIBIL score.
- Maintain a good mix of secured and unsecured loans: Having a mix of secured and unsecured loans in your credit profile demonstrates your ability to handle different types of loans and increases your creditworthiness.
Things you need to keep in mind before applying for a business loan
Here are a few things you must keep in mind before applying for a business loan:
Healthy credit history:
It is important to have a healthy credit profile, ideally with a CIBIL score of 750 or above. As applying for a loan with a low CIBIL score may lead to rejection of your loan application.
Planned business strategy:
It is essential to have a well-planned business strategy as banks and NBFCs scrutinise your business plan before granting you a loan. Therefore, ensure that you have a solid business plan to present to the lender.
Collateral:
Collateral can be any asset that has a monetary value, such as property, gold, or securities. Therefore, before applying for a business loan, ensure you have a clear idea of the collateral that you can pledge and ensure that it covers the amount of the loan you are seeking.
Interest rates and fees:
As different banks/NBFCs may have different interest rates and fees. Thus, it becomes important to compare the rates and fees of different lenders before making a decision.
Loan amount:
When applying for a business loan, it is important to determine the amount of loan you need to achieve your business goals. Apply for a loan that you can realistically repay and ensure that the loan amount is sufficient to cover your business expenses.
Repayment period:
The repayment period of a business loan can vary from lender to lender and can range from a few months to several years. Ensure you understand the repayment period of the loan you are applying for and choose a repayment period that suits your business needs.
Loan application process:
Different banks/NBFCs may have different loan application processes, so it is important for you to understand the process and other requirements of the lender you choose. And ensure you have all the necessary documents and information ready before you apply for the loan.
Disclaimer: Please note that the information provided in this article is intended for general informational purposes only and should not be construed as professional advice or relied upon as a substitute for consultation with qualified experts. The accuracy, completeness, and timeliness of the information presented in this article may vary and are based on the knowledge and resources available at the time of writing, which may not be comprehensive or up-to-date.
