A business requires capital for its growth and expansion. Whether it is buying new equipment, inventory, expanding operations, increasing working capital, etc., you need enough funds to execute your plans well. Moreover, you need to have enough liquidity to run the daily operations of your business. To meet such business needs, you may need a loan. Your loan approval depends on various factors like business revenue, assets, profit, liabilities, collateral value, etc. But, this still isn’t enough. Before approving a business loan, lenders check your credit history too. Long and good credit history is an important part of business loan approval. You must have a good credit score to show your creditworthiness.
Business Credit Score At a Glance
Simply put, it tells whether you will be able to pay back an amount that is borrowed. Business credit scores typically range from 300-900. A score of 700 and above is a good score. What this means is that lenders are very confident in lending money to individuals or businesses with this credit score. In addition, those with scores in the range of 500-700 can obtain loans easily. Credit scores in the range of 300-500 are considered average, and with 300 are very poor. Getting a line of credit is very difficult in case of low credit scores.
Banks and lenders go beyond the business credit scores and check the owner’s personal credit score. By checking personal credit, the lender would get to know how well you manage your personal finances and if you are responsible towards them. Therefore, managing both business & personal credit score is very important. A bad credit score is an obstacle that prevents you from obtaining loans and thus can hamper your business.
Business Loan Eligibility
Generally, the following people are eligible to apply for a business loan in India:
- Private Limited or Limited Company
- Partnership or Proprietorship Company
- Chartered Accountant
- Self Employed Professional
- The applicant should be between 21 years up to 65 years of age
- The business should be making a profit for the past 2 years
- Rs 1,50,000 per annum must be the minimum annual income of the company
Business Loan Options for a Bad Business Credit Score
Businesses have many options to obtain financing. Banks and other financial institutions extend loans to business owners. But, banks and lenders need an assurance of getting their money back before approving your loan, which is where your credit score comes into the picture. Missing out on paying your credit card dues or defaulting on a loan EMI payment may hamper your credit score, thereby reducing your chances of obtaining a loan for your business.
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So, what do you do in case you have a bad credit score, but you require a loan to run and expand your business? The first important thing to note is you must work towards building your credit score! A few other options you can consider exploring for getting a loan are:
1. Banks: Although banks are reluctant in providing business loans to individuals with a bad credit score, they may be willing to do so under certain conditions. For example, some banks may agree to provide the loan at a high interest rate. Further, if you have a fixed deposit with a bank, you may be able to obtain a loan up to the amount of the deposit held.
2. Business credit card: A business credit card can also be used to get a line of credit. The credit eligibility may vary depending on your past payment history, etc. Although obtaining a business credit card may be easier than obtaining a loan, it’s important to know that the interest rates associated with such cards are typically very high.
3. NBFCs: You can also approach non-banking financial institutions for your business loan requirements. NBFCs do not have a banking license, but they are authorized to provide loans. While NBFCs can sanction high loan amounts, the interest rates they charge are also higher. Further, the credit score requirements are not very stringent when it comes to obtaining a loan from NBFCs.
4. Revenue-based loan: In this option, the business receives funds in full upfront, and agrees to repay the loan based on a percentage of the future monthly revenue. The repayments continue until the principal and interest are fully paid. For a revenue-based loan, the company must have a good credit score and must make above Rs 100,000 sales in a year. Moreover, the loan amount cannot exceed 10% of the company’s revenue.
5. Microloan: It is a small loan made for emerging small businesses and startups. A microloan is offered by nonprofit organizations called as microlenders. This type of loan typically has repayment terms of up to 7 years and offer favorable interest rates compared to those available through online lenders.
6. Secured loan: If the company owns valuable assets like property, machinery, technology, etc., you can obtain a secured loan against these. Such loans come with less risk for the lenders.