Startups, traders, retailers, and manufacturers are increasingly relying on commercial loans. A business loan can be used to meet working capital needs and a variety of business expansion activities such as purchasing plant and machinery, managing cash flow, training employees, and hiring new employees. However, the company’s credit/CIBIL score must be good before applying for a business loan.
Being an owner of an Indian MSME, you’re probably aware that obtaining a business loan requires a good credit score. It is because it demonstrates your level of trustworthiness to the lender. In addition, amply high CIBIL scores indicate to the lender that you are a low-risk borrower. As a result, obtaining a business loan should be a piece of cake if you meet the lender’s money lending requirements, like overall experience in managing a business as well as your per annum earnings.
What is a Credit/CIBIL score?
Credit Information Bureau (India) Limited (CIBIL), formerly TransUnion, is an Indian credit bureau. A credit information company (CIBIL) collects and manages financial data provided by financial institutions to generate a credit or CIBIL score for individuals and businesses that represent their creditworthiness and ability to repay. Furthermore, the RBI has granted licenses to three more credit bureaus: Equifax, Experian, and CRIF Highmark. However, TransUnion CIBIL is India’s most popular credit bureau. CIBIL manages credit files for 32 million businesses and 600 million individuals worldwide.
The credit history of an individual or a business is summarised in a three-digit number known as the credit score of an individual or enterprise. The number represents the report, rating, and credit history of a company or an individual. Credit scores range between 300 and 900. The higher the credit score, the better the credit history and ranking. A rating of more than 750 is said to be considered reasonable by Indian financial institutions.
Financial institutions consider a credit score of more than 750, or as close to 900 as possible, to be good. It raises the chances of loan approval even more. On the other hand, a credit score of less than 750 makes it difficult to obtain low-interest loans. Each credit bureau calculates the credit score using a different algorithm. Out of the four credit bureaus that operate in India, the credit score calculated and managed by CIBIL is used by most lenders, including banks and NBFCs (TransUnion CIBIL, Experian, Equifax, and High Mark).
Six ways to maintain a good Credit score
- For Starters, get a loan: This may appear to be counterproductive at first glance. However, it is a very effective way to raise your credit score. It is beneficial if you don’t have any credit. Remember that you won’t get a quick business loan if you have no credit history. It is because the lender has no way of knowing whether you will pay back the loan on time. Financial stability and repayment ability, financials, and any loan defaults are all factors considered by small financial institutions. If they believe everything is in order, they will have no trouble approving a business loan.
- Don’t overuse your credit card: For all of your credit cards, you must adhere to a straightforward rule: your card usage must not exceed 30% of the total credit card limit. It will assist you in maintaining a stable credit score. A high credit utilization limit could also signal an impending debt burden. If your credit utilization is high, take steps to reduce it. To be fiscally responsible, avoid making all purchases with your credit card. Excessive use provides the lender with information about your spending habits, which you should keep private.
- Joint loans are a big No-no: To increase their chances of getting a business loan, many people use joint loan applications for business capital loans. While this method increases your chances, you run the risk of overlooking the possibility that your co-applicant will make an error, resulting in a payment default. It could affect your ability to get a small business loan online.
- Try to pay back loans in a timely fashion: Unpaid bills and EMIs, for example, can hamper your business financing application. Any missed payments will harm your CIBIL score. You’ll eventually miss out on a business loan, whether it’s due to a cash crunch or a missed deadline. To curtail such situations, have reminders for all your weekly, monthly and annual payments. You can use technology to help you with this, such as smartphone applications. When it comes to cash crunch situations, planning can save you time and money.
- No back-to-back loan applications: Your credit score will be lowered if you apply for business loans in a short time from different moneylenders. In these situations, your CIBIL report will show a slew of “hard inquiries” or lender inquiries that will lower your credit score. A potential lender will see you as someone who is in desperate need of money.
- Keep an eye on your credit score: Many people make the fatal error of checking their credit score right before they need quick small business loans. It may not be enough time for them to deal with a negative credit report remark. Regularly checking your credit score – once every 4 or 6 months – will, on the other hand, give you plenty of time to take the necessary precautions to avoid situations like these before applying for business financing.
So, get a simple business loan; if you don’t want to put your house at risk, an unsecured business loan is a better option. Indifi is a technology platform that collects and analyses data about businesses from various sources to gain insights into their creditworthiness, past and current industry performance. As a result, you can obtain a Business Loan of up to Rs 50 lacs in less than 24 hours using multiple lender channels and personalized lending, with minimal documentation, no collateral required, and higher approval chances.