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How Personal Credit Score Can Determine Your Business Loan EMIs?

14 May 2019

It is often assumed that the individuals representing the business & their personal credit scores and the business entity along with the business’s credit score are separate and have no bearing over one another. Due to this, often people overlook their personal credit score for a business loan. In many cases, either the loan application is rejected or one has to pay higher EMIs.

Although it happens in certain cases out of all, as a small business owner you should be aware that your personal credit not only influences your company’s access to capital but also affects many other aspects of the business. Many financial institutions also consider other data sources, however, one must be aware of minimum credit or minimum CIBIL score for a business loan for a hassle free transaction.

Let’s understand the nitty-gritty of credit score in depth.


Why Credit Score in India matters for a Business Loan?

Before we delve further, here are a few reasons a business owner must know about the importance of credit score,

  • A few government-approved business loans with lower interest rates are dependent on personal as well as the business credit score.
  • One can benefit from cheaper interest rates on loans with a higher credit score from NBFCs and banks alike.
  • Availing pre-approved loans, from more than one source, is easier with a good credit score.
  • Businesses can get loans with longer tenure, thus smaller EMIs that positively impact a business’s financial growth.
  • A good credit score also helps in getting quicker approval on loan applications.
  • Credit score categorized as good and above also helps in getting discounts on loan processing fees and other charges, lower EMIs, and also widens the scope of negotiation, thus helping save money on financing.
  • Many times, a few larger corporations also check the credit score of small enterprises to know their credibility before doing business with them.


Forms of Businesses where Personal Credit Score plays an Important Role

A business can take different forms upon incorporation depending on its structure and each one of these is affected by personal credit score especially when applying for a business loan.

  • Sole Proprietorship: As the name suggests, here, the sole proprietor is responsible for this form of business. Therefore, their personal credit score and decisions carried out in the capacity of a business owner affects the business loan’s EMI and other factors.
  • Partnership Concerns: An extension of sole proprietorship concern, here, it is unlikely that the loan lenders would not scrutinize the personal credit score of all the founders or the owners while they apply for a business loan.
  • Private or Public Limited Companies: As these evolve with a larger scale of operations and have a separate legal standing, in most cases the personal credit score of the founders or key personnel does not influence the approval or rejection of business loans. However, the business’s own credit score can be an influential factor.


Forms of Credit where Personal Credit Score is Important

Just like the form of business, personal credit score also affects the forms of credit applied for. Let’s take a look at them here,

  • Short-Term and Long-Term Loans:
    As short term loans are categorized as riskier lending, the personal credit score of the applicant is a deciding factor of loan approval. Similarly, long-term loans not backed by collateral are also dependent on the personal credit score of the applicant.
  • Equipment Financing: It is unlikely that a loan lender would look into the personal credit score if the credit is towards equipment financing. However, in most cases, this form is credit is backed by the collateral of the equipment purchased.
  • Invoice Factoring: Obtained against the collateral of accounts receivable, here, as collateral is already present, the personal credit scores of the applicant is often overlooked.


How much Credit Score is required for Business Loan?

The credit score is a reflection of financial wellbeing and also the key to getting a loan application approved quickly. Implications and definitions of the credit score are dependent on the credit bureau, however, knowing about a general credit score can help one recognise the creditworthiness.

  • 750 & Above: Considered excellent and reflects that the borrower has been consistently paying the loan instalments and credit card bills on time. Also implies the possibility of getting various loan benefits such as favourable deals on all kinds of loans, low-interest rate and quick loan approval.
  • 700 – 749: Considered good and reflects that the applicant is dependable and has good chances of getting approval on the loan application, however, the risk is still there.
  • 650 – 699: Considered fair and also indicates that the applicant has performed neither too good nor bad in financial planning and execution. However, the applicant might not get the loan at favourable terms and conditions.
  • 550 – 649: Considered poor and reflects risk category for lenders as the borrower is financially unstable and might not be able to pay the loan amount on time. Even if the loan lender agrees to give the money, they will ask for a guarantor to reduce their risk.
  • 550 & Below: Considered bad and any individual with this score is not considered by most banks and NBFCs. It would take years of regular and consistent repayment history to help in a gradual increase of this credit score.

A few NBFCs like KNAB Finance has a very simple criterion that helps get a loan easily and within 3 days. Know more about getting an instant loan on CIBIL score from KNAB Finance.


How to Improve your Credit Score?

Although there are no quick fixes to address credit score related problems to get better EMIs, there are ways to improve the score gradually.

  • Regularly check your credit score to be able to take immediate action if it drops down.
  • Use any kind of credit wisely and avoid the temptation to regularly access all of the available credit.
  • Don’t jump around by transferring balances from one source to another as this gimmick hurts the credit score.
  • Make timely payments and meet your obligations to positively move your score in the right direction.
  • Don’t apply for credit if you do not need any.

Every business needs funding at some point in time. Working towards a good credit score, no matter what form of business you run will always help in borrowing credit when the time comes. At the same time, it is also important to perform a credit score check at regular intervals to be able to take the right steps in business and in managing personal finances.

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