Can I Get a Business Loan with Bad Business Credit Score?

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.

Related ReadsA Quick Infographic on Smart Ways To Maintain Your Credit Score

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

Other factors:
● 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.

Related Reads— How Do Banks Assess Your Business’ Creditworthiness?

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.

So, start building your credit score. Check the free credit score offered by CRIF and start monitoring it from today and ensure a smooth business journey!

Is Promoter’s Credit Score Important For A Loan For Business?

Your personal credit score is very different from the business credit score and usually does not affect each other. Both the scores are calculated on the basis of different sets of parameters that are followed by the RBI regulated credit bureaus like CRIF. The range is also very different from each other. If that makes you think that both the paths will never cross each other then here’s the answer to it, ‘NO’ that is not true especially if you own a small business.

For most small business owners, the need to build and maintain a good personal credit score never goes away. Although it’s true that some banks and lenders tend to weight the value of your personal score higher than others when they evaluate your business loan application, most lenders include a review of your personal credit score when they evaluate your business’ creditworthiness.

When you set up a business and create a certain corporate structure, you assume your identity and the identity of the business that is created will be different from one another. However, for a small business, the founder is often the face of the business. This means lenders would take a close look at your personal finances to arrive at a decision.

Why Do You Need a Credit Score?

Credit scores a three digit number calculated by credit bureaus like CRIF determines your financial stability and credibility. It ranges from 300 to 900 where below the 700 is considered to a bad credit score. It is used by banks to make a decision regarding a loan application or a credit card application. A bad credit score depicts your repayment irregularities and bad credit behaviour which leads to the refusal of loans and credit. A credit score is also used to determine the rate of interest where a good credit score can fetch you lower rates of interest while a bad one can give you a loan with high interest rates.

What is the Difference Between Personal and Business Credit Score?

Personal Credit Score is the credit score an individual has, showing his financial credibility. The parameters on which it is calculated are various financial activities including repayments, bill payments and maintaining credit accounts, mainly. Business Credit Score is the credit score that the business will have and some of the parameters on which the score is calculated are profits of the business, turnover of the business, financial activities of the business and many such details of the business that determines the credibility.

Types of Businesses Where PCR can Affect a Business Loan

In company law, there is a concept of lifting or piercing the corporate veil. While it is used when cases of fraud and impropriety are being decided and where the rights, duties and liabilities of a company become the rights, duties and liabilities of its shareholders, lenders often decide to follow a similar path. It is seen in many cases lenders specifically want to know the track record of the business owner, thereby treating the company and the owner at an almost equal footing. So which forms of business does your personal score start impacting?

Sole Proprietorship: These are most vulnerable to damage due to proprietor’s low credit score. In a sole proprietorship, the business and the owner are the same. Here, the business and owner share one credit score.

Partnership Firms: When it comes to partnership firms, the credit score of all partners is checked. If things are not upto mark post credit checks then the loan could be available to the business at a higher rate. The business may or may not be able to afford costly debts and therefore this again becomes a reason that would impact the growth negatively.

Private Limited Companies: Banks check the credit background of all the directors of the company. When credit scores are not meeting lender’s standards, once again either the loan application can be rejected or the loan would be available at a higher rate of interest.

Quick trivia for the business owners who have just embarked on the journey towards expanding your business or starting something of your own, make sure your personal credit score is on point as it will help you get your funds from the banks and lenders. to know about the difference and how each score has its own way of coming together, read more on CRIF Blog about how to build and maintain personal and business credit score.

How Do Banks Assess Your Business’ Creditworthiness?

There are endless aspects that have to be looked into to build a business from scratch. Collecting capital to bearing the expenses and utilizing resources to its maximum potential needs constant on a regular basis. Once the business starts to pick up a pace there is a desire to expand the business for the better and often a financial help is all that you need to do so. Banks play an important role and a good business credit score is the added advantage to your business.

When a business applies for a loan, the bank follows a certain protocol when evaluating the application. One thing the bank uses is the 5 Cs (Capacity, Collateral, Capital, Character and Conditions) of credit analysis to evaluate the application for the loan. Banks are always on the look-out for creditworthy customers to lend to, each bank has its own criteria as to how they arrive at their lending decisions.

It is also important to make it right the first time around because; with every credit rejection your credit profile could be affected in a negative way. Business credit scores give entrepreneurs an idea about the required purchasing power to pursue their dreams, solve a customer need or to expand into other areas.Primary factors taken into consideration while being assessed by the banks before deciding your business’ creditworthiness are:

Detailed Study of Your Business:

The banks do an extensive research about your business to evaluate the nature of the business and what future the business could end up with. A study on how the business has been running and for how long has it been existing in the marketing. A thorough check on the partners involved and the collateral connected to the business is also done to ensure the ability of the business.

Business Credit Score:

It is needless to say that a business credit score has to be above 750 to be on the good books of banks. It is essential to keep a regular check on your credit score and make sure that it does not fluctuate often. It often is the summary or a depiction of your creditworthiness and also gives a brief idea about repayment history of the credit that is already availed. A check on your credit score annually with a RBI regulated credit bureau like CRIF is an important step to maintain the creditworthiness of your business.

Past Searches With the Credit Bureaus:

Your past searches with a Credit Bureau like CRIF will be recorded as the number of times you have attempted to get credit from the lenders which might not be a very positive thing to do when it comes to maintaining a good credit history.

Loan History:

The company’s loan history gives a clear picture of what credit behavior it has. It checks each loan that you have taken in the last 36 months with your repayment regularities and irregularities. The banks also keep a check on activities where your company has been the guarantor.

Banks could also ask for memorandums in the case of complexities that are present in the organizational or ownership structure. But the most important factor and which we cannot stress enough is the presence of a good credit history; especially for a business creditworthiness which depends on your business credit score provided by authorized credit bureaus like CRIF. Keep your business credit score on a check and you will have no hindrance in getting funds for the growth of your business!

Business Credit Score vs. Personal Credit Score

Personal Credit Score vs Business Credit Score, What’s the Difference?

Personal credit score and Business credit score are two different types of scores that show the financial ability. A personal credit score is the depiction of an individual’s credibility while a Business Credit Score is the representation of the business’s credibility. The scores are usually not linked with each other unless the business is a small sized business where the owner’s personal credit score influences too. Let us break down both the scores for you to understand it better.

What is Personal Credit Score?

Personal Credit Score is a three digit number ranging from 300 to 900 representing your financial ability and credibility. A credit score is primarily based on the credit report information that is sourced from RBI regulated credit bureaus like CRIF. The perfect credit score to get a better credit is 750 and above. Higher the score, higher is the credit limit for your credit card, lower are the interest rates and faster is the process of getting the loan as a good credit score is ideally the best way to know one’s financial habits. A score of 650 or lower will hamper your chances to get a credit from trusted financial institutes. Simplest ways to maintain and have a good credit score is to keep a check on your credit report, paying bills on time and being financially consistent and stable.

Who and What Determines Your Personal Credit Score?

Credit Bureaus like CRIF assign your creditworthiness a score, using variations of the CRIF Score algorithm.
Personal credit score is made of five key components:
● Payment history (35%)
● Amounts owed (30%)
● Length of credit history (15%)
● Credit mix (10%)
● New credit (10%)

Tips to Boost Your Personal Credit Score

● Since paying your lenders on time represents 35% of your credit score, sign up for automatic payments for all of your credit accounts.
● Adjust your due dates according to you by requesting the banks or lenders. You don’t have to settle for a due date that is poorly timed with your paycheck.
● Aim for a credit utilization ratio of 30%. Whenever it is possible, pay off your credit cards in full month after month. A credit utilization ratio of under 30% across all cards is a sign for lenders that you’re managing your credit responsibly.
● Handle new credit carefully as opening too many new credit accounts will depict a behaviour that shows instability and every time you open a new credit account your credit score takes a small hit.
● By closing your oldest account, you may dramatically reduce your length of credit history and negatively affect personal credit score.
● Every year you can check your credit score online with RBI regulated and trusted credit bureau like CRIF for free. Keeping a check on the credit score is a habit that you should instil to be aware when the score falls or when it should

Why does an Individual need a credit score?

To have a credit score is mandatory for an individual to make sure that his credibility is not questioned when he seeks credit from the financial institutions. Having a good credit score means escalated loan process, better interest rates, bigger credit limit and faster approvals on loan requests.

What is Business Credit Score?
A Business credit score is a numeric representation of your company’s creditworthiness. It ranges from 300 to 900 in India. The information on your business credit report is used to produce the score, and business lenders use it when they are considering your credit application to predict the financial stability and credit behaviour. A higher score means your business has a history of paying bills on time.

Who and What Determines Your Business Credit Score?

Credit Bureaus like CRIF take into consideration various factors while calculating and determining the credit score for your business. Key Components of the Business Credit Score are:
● The number of years in Business.
● Lines of Credit applied for past 9 months.
● New Lines of Credit opened
● Collections and Liens past 7 years
● On time payment history.

Tips to Boost Your Business Score:

● Check your credit report at all times to keep track of what has a negative and what has a positive effect on your credit score.
● Pay your bills on time to show stable credit behaviour.
● Decrease your credit utilization ratio for reflecting a good credit behaviour of the company.
● Make sure when you pay off the debts the negative account is deleted.
● Add positive payment experiences in the payment history of the business.
● If you have a small sized business then keep your personal credit score on a check too.

Why Does Your Business Need Credit Score?

A business credit score helps in separating business from personal finances. During the application process, your underwriter will take a look at additional documentation, such as bank statements or business credit reports. Keeping your finances separate is important for two key reasons, tax deductions and preventing a creditor from having a stake in your personal assets to satisfy a debt.

Benefits Of Having a Good Business Credit Score – An Infographic

Good credit is the lifeline of your business. Sure, it’s a must for obtaining funding for launching or expanding your business. But that’s only the beginning. Here are just a few of the many benefits of good business credit score.