A business needs capital and funds inflow constantly for working capital, operating expenditures, purchasing equipment and machines, and broadening the business. The needs can be met by getting a business loan from financial institutions, such as banks, NBFCs, fintech entities, open markets, etc.
Nonetheless, availing of a business loan is not that easy, the business has to be eligible on the basis of multiple criteria, in particular, the annual turnover, ITR, banking, credit history.
Out of many business loan requirements, the most significant criterion is the credit history of the business that is being decided by the CIBIL score.
In this post, you will get to know about the importance and the relation of credit score with a business loan.
What is a credit score?
Before we proceed ahead, let’s get a cleanse understanding of credit score. A credit score is a number authorized to the business, on the basis of the examination of the credit history of a business that involves the credit card usage, bank accounts held & shut, payment history and the credit enquires performed by the business.
Where to check the credit score of my business?
There are certain credit bureaus authorized by the Reserve Bank of India, that extends credit scores in India. Equifax, Highmark, Experian are the most popular bureaus that allocate the credit score. Thus, you can use any of these to check the credit score of your business.
What is a good credit score?
A credit score is often stated as CIBIL score which ranges from 300 to 900, where 900 is a great score and 300 is poor. To understand the behaviour of a credit score, we have drawn seamless and easy-to-understand pointers shown below:
- 0 or -1
If there is no loan or credit card, you have taken then no credit history is made and the score will lead to zero.
- 300 – 550
This range of credit score is considered to be bad. This takes place due to the constant defaults in the payment and as a consequence, the chances of getting the credit becomes low.
- 550 – 650
This range states that your business is consistent with the payments. Thereby, there are positive chances of availing new loans and credit cards.
This range is considered as a safe zone and there are higher possibilities of obtaining a loan on the basis of present payment habits of your business.
- 750 – 900
As we stated earlier, this is the excellent range and you can definitely avail the loan for your business on the basis of good credit history.
Importance of having a good credit score
Let’s take a look at the importance of having a good credit score:
- Financial institutions vitally seek your credit score before determining to extend a loan or credit card to you.
- A credit score can be also demanded if you are availing services from companies like utility organization, service industries, etc.
- The potential employer can also ask for the credit score in order to run the background verification process prior to offering a job.
- A good credit score helps you in availing the loan at a lower interest rate.
- Exceptionally, the bank can check the credit score prior to opening the bank account.
How to avail a loan with a bad credit score?
If you are having a bad credit score, the reason behind it can be losing on credit card dues, defaulting in repayment of the loan instalments. A bad credit score diminishes the probabilities of getting a business loan and even if somehow you get it, the particular business loan interest rate will be so high. By the way, there are still resolutions to confront this problem.
Let’s take a look at some of the alternatives that you can opt for even with a bad credit score: –
- Line of credit alternative
It is rather easy to avail a business credit card than a loan, in accordance with the past payment record, the credit limit is being determined but the credit is largely received at a higher interest rate.
Mostly, banks do not extend business loans to individuals with a bad credit score. Nevertheless, in some unusual cases, it might give a business loan at a higher interest rate.
The criteria in Non-Banking Financial Corporations (NBFCs) for a credit score is not so steady for the borrowers to acquire a business loan. Since most of them extend an unsecured business loan, the interest rate charged is high and the borrowers can take out a higher loan amount.
- Loans with Collateral/Security
You can opt for loans with collateral to avail of a business loan even in a bad credit condition. If you have assets like a house or business land, machinery, equipment, etc. that you can mortgage with the financial institution then such loans can stand out as your best companion along with a lower rate of interest.
- Loan on Future Revenue
Another alternative, you can opt for even with a bad credit score is a loan on future revenue. The deal is built between you and the moneylender where the business loan amount is provided as hoped by you and a particular percentage of the monthly revenue of your business is being deducted and paid as an instalment till the entire loan amount is being paid off.
Nevertheless, there is a situation that the loan can’t surpass 10% of the total revenue of the business.
- Loans for Small Scale Businesses
These sorts of loans support the emerging small-scale start-ups to obtain loans from non-profit organizations (NPOs). The loans are extended at a good rate for a decent term.
In the event, the borrower possesses a bad credit score, s/he should start working on the enhancement of the score so that s/he becomes eligible to avail an expected business loan amount.
Final touch – Tips to maintain a good credit score
There are many business loans online that you can find but a credit score is a factor that determines the most of chances of getting the loan.
So, lastly with the final words, leaving you with certain tips so that you can maintain a good credit score. Have a look.
- Utilize a credit card but bound yourself to 40% of the credit limit.
- Pay off the credit card dues and instalments on time.
- Manage inquires and application for the new loans or card.
- Be constant in utilizing your old credit card, since the closing of the card can diminish the credit score from a few points.
- Control your existing loans as multiple debts can affect your credit score.
Keeping up a good credit score health leads to chances of getting a higher amount of business loans online or offline that will cater to the purpose for which the business loan is being acquired.
Thus, it is vital for your business to enhance credit score in order to avail a business loan from varying sources with a good deal.