Credit Score for Business Loan: What They Are and How to Improve Them (2024)

Though a humble three-digit number, a credit score mirrors creditworthiness. A credit score is an economic report card reflecting an individual or business's reliability with money and if they can manage their money well. These scores play a crucial role in determining loan eligibility for business financing.

The Confederation of Indian Industry (CII) conducted a survey in 2022. As per the report, approximately 63% of small and medium-sized enterprises (SMEs) reported that access to timely and affordable business loans remains a significant challenge due to low credit scores.

A credit score reflects various financial factors like credit history, payment behaviour, length of credit, types of credit used, and amounts owed. Typically ranging from 300 to 900, higher scores indicate better terms and conditions for loans.

Credit scores are vital for business loans as they provide lenders with a measure to know whether money should be loaned out to you or not. It helps lenders swiftly evaluate the likelihood of borrowers repaying their loans as agreed.

A credit score is affected by various factors. For example: how often you pay your bills on time, how much money you owe, etc. The better your score, the more likely you will be able to get a loan or a credit card. Maintaining a positive track record in these areas can bolster your credit score and enhance your eligibility for favourable business loan terms.

Collateral refers to assets or property that a borrower commits to a lender as security for a loan. If a borrower doesn't repay the loan, the lender can take away the security to recover the funds.

While collateral can reduce the lender's risk, not all businesses have sufficient assets to offer as security.

In such cases, unsecured business loans become a viable option. Unsecured loans don't require security hence making the borrower's reliability even more important.

Lenders assess the credit score for business and financial history to determine the likelihood of timely repayment. A strong credit score can help if you are not able to present security for your loan. This makes it more likely for a business to get an unsecured loan.

Nevertheless, businesses equipped with valuable assets to put up as collateral can rely heavily on secured loans for financial support in managing business operations or fuelling working capital.

The minimum credit score required for a business loan can vary based on several factors, including the lender, loan type, and borrower risk.

If an individual is considering applying for a loan, a credit score of 700 or higher is required. However, other lenders may have varied minimum credit score thresholds.

Additionally, if your business is new, lenders might consider the personal credit scores of business owners to assess the business's creditworthiness.

Credit scores offer banks and NBFCs a consistent and unbiased metric for evaluating loan applicants. This standardized approach empowers lenders to make reliable and well-informed lending choices, enabling them to better handle risk assessment and allocate resources efficiently. It also expedites the identification of prospective borrowers who are more likely to meet their financial commitments, simplifying and expediting the loan approval process.

For instance, a higher credit score signifies lower risk as it reflects a track record of responsible financial behaviour and an increased likelihood of prompt loan repayment.

Your credit score directly impacts your eligibility for a business loan and the terms you'll be offered.

The influence of your credit score extends beyond eligibility. It plays a very crucial role in determining the terms of your loan, such as the interest rate and loan amount.

Lenders prefer lending money to people who have good credit scores since such people are more likely to pay them back. Therefore, someone with a poor credit score usually does not get favourable terms for a loan.

When a company seeks a business loan, it is required to submit a range of documents to the bank. These documents provide the bank with insights into the company's financial standing, including its current assets and liabilities, as well as the amount of funding it intends to borrow. The bank evaluates these documents as part of the business loan application process to determine whether the company qualifies for the business loan.

If your business documents like identity proof, income tax returns, and other business operating documents are in order and establish your credibility to repay the loan, the bank or financial institution grants instant approval for the business loan.

Organisations use credit scores to decide if they can get a loan. If you have a good credit score, you can get a loan with a low-interest rate. If you have a poor credit score, you may not get a loan. Thus, aiming for a higher score should be a priority.

By understanding the impact of credit scores, diligently managing your financial responsibilities, and preparing a strong loan application, you can pave the way for securing the funding necessary to drive your business forward.