When applying for a business loan, the credit score of the business owner plays a pivotal role in determining eligibility. While lenders consider the business’s financial health, the owner’s creditworthiness is equally significant, especially for small businesses or sole proprietorships where personal finances often intertwine with the business. A business owner’s CIBIL score, which ranges from 300 to 900, gives lenders an insight into their repayment habits, financial discipline, and overall risk profile.
Generally, the required minimum CIBIL score for a business loan is 650 or less. However, this may vary from one lender to another. Additionally, how well you meet the other business loan eligibility criteria also plays a significant role in loan approval and the terms offered to you. But having a high score can be quite beneficial. Here’s an in-depth look at how different CIBIL score ranges impact a business loan application and what steps to take to improve the chances of loan approval.
CIBIL Score Ranges and Their Impact on Business Loan Eligibility
Scores Below 550: High Risk
A CIBIL score below 550 is considered poor and signals high credit risk. Business owners with this score often face challenges such as:
- Frequent Defaults: The score may reflect missed or delayed repayments
- Low Financial Stability: High dependency on credit or irregular income patterns can contribute to a poor score
Impact on Loan Eligibility:
- Loan applications are likely to be rejected by traditional lenders
- Applicants may need to rely on secured loans or approach alternative financing sources like NBFCs
- Higher collateral requirements or co-applicants may be necessary to secure a loan
Scores Between 550 and 650: Moderate Risk
This range indicates a moderate credit risk. Business owners with this score may have a mixed repayment history, occasional defaults, or high credit utilisation ratios.
Impact on Loan Eligibility:
- Limited loan options may be available, often with higher interest rates
- Lenders may impose stricter conditions, such as shorter tenures or higher EMIs
- Strong supporting documentation, like income statements or business performance reports, may be required to offset the moderate risk
Scores Between 650 and 750: Average to Good
Business owners with scores in this range are considered moderately creditworthy. This score reflects fairly consistent financial habits, though occasional delays or high credit utilisation may exist.
Impact on Loan Eligibility:
- Standard loan terms are likely to be offered, with moderate interest rates
- Approval chances are higher if the business has a robust financial track record
- Additional supporting documents, such as audited business financials, may strengthen the application
Scores Above 750: Low Risk
A CIBIL score above 750 is ideal and demonstrates excellent creditworthiness. Business owners in this range are considered low-risk borrowers due to consistent repayments, low credit utilisation, and a well-balanced credit portfolio.
Impact on Loan Eligibility:
- High chances of loan approval with favourable terms, such as lower interest rates and longer repayment tenures
- Access to higher loan amounts based on the business’s financial requirements
- Faster loan processing due to the lender’s confidence in the applicant’s repayment ability
Why Lenders Focus on the Business Owner’s CIBIL Score
For business loans, especially those extended to small and medium enterprises (SMEs), lenders assess the business owner’s credit score for several reasons:
- Personal Liability: In cases where the business’s financials are insufficient, lenders consider the owner’s personal financial stability to ensure repayment
- Risk Assessment: A strong personal credit score assures lenders of the owner’s ability to manage financial obligations, reducing the perceived risk
- Guarantor: Business owners often act as guarantors for loans, making their credit history crucial in the approval process
How to Improve Your CIBIL Score for Business Loans
If your credit score is low, there are actionable steps you can take to improve it before applying for a business loan:
Ensure Timely Payments
Regularly paying EMIs, credit card bills, and other debts on time helps establish a positive repayment history, which is a major factor in your CIBIL score.
Reduce Credit Utilisation
Keep your credit utilisation below 30% of your available limit to demonstrate responsible credit usage. Requesting a higher credit limit can help achieve this without reducing expenses.
Avoid Multiple Loan Applications
Frequent applications result in multiple hard inquiries, which can lower your score. Research lenders thoroughly and apply only when you are confident of approval.
Monitor Your Credit Report
Check your credit report regularly for errors or discrepancies. Dispute any inaccuracies promptly to prevent them from affecting your score.
Diversify Your Credit Profile
Managing a mix of secured and unsecured credit shows your ability to handle various types of debt responsibly.
Alternatives for Business Owners with Low CIBIL Scores
If your score is below the ideal range, consider these alternatives to secure financing:
- Secured Loans: Pledge personal or business assets, such as property or equipment, as collateral to increase your eligibility
- Co-applicants: Adding a co-applicant with a strong credit score can improve approval chances
- NBFCs or Private Lenders: These institutions often have more relaxed criteria compared to banks, though at higher interest rates
- Government Schemes: Explore SME-focused government schemes offering relaxed credit requirements
A business owner’s CIBIL score significantly influences their eligibility for business loans. It affects your approval chances, loan amounts, interest rates, and tenure. Check your CIBIL score regularly to assess the effect it may have on your loan application. Scores above 750 offer the most advantages, including favourable terms and higher loan amounts, while lower scores may necessitate collateral or additional guarantees. By adopting disciplined financial practices and exploring alternative financing options, business owners can improve their credit profiles and secure funding for their ventures.
