Having a strong business concept and the passion to drive this business plan into reality sets the foundation to run a successful business. Another factor that is as important to run a business is money. With many lending institutions offering a lot of credit options, it is not difficult to get a business loan. But the difficulty to get any loan approved by the lender is when you have a bad credit score.

Why credit score is important?

A lender determines your loan repaying ability and credit worthiness by looking at your credit score. Your credit score is a 3 digit number that is calculated based on your credit history, your past repayments, credit profile and other factors. Any score above 750 is considered as a good credit score to avail business loans at low interest rates. Whereas any score between 300 to 600 is considered as a poor credit score. Though you may become eligible to apply for a business loan with a bad credit score by certain banks or lending institutions, you may be offered a business loan with higher interest rate.

However it is very essential for your business to maintain a good credit score before approaching  any bank or NBFCs for business loan. It depicts your past borrowings and repayment history as shared by the lenders. When you apply for a business loan, the bank will review your application and simultaneously check for your credit score by approaching the respective credit bureau. At this point, possessing a low credit score will increase your chances of loan rejection, as it implies you have not managed your finances properly in the past.

Business borrowers should pay attention to the following points before approaching any lender for credit options.

  • A lower credit score may result in a higher interest rate on your loan. Hence, avoid looking out for a business loan with a bad credit score.

  • Wait and improve your credit score. This can qualify you for more loan options at better interest rates.

  • You can get immediate cash from your unpaid customer invoices through invoice factoring or financing. Lenders will consider the loan approval mainly on the value of your invoices.

If your credit score is on the lower side,  here are some ways that can help you get immediate business loans:

Request your current banker: One of the best ways to get an unsecured business loan is to approach the bank where you already have an account with the bank and have been in good relationship with. You can explain your situation to the bank manager,  i.e. past mistakes and current business operations, and request for an unsecured business loan with low interest. A right negotiation can help you get you a business loan without much effort provided you display a promising repaying ability.

Collateralized business loan: Also called as secured loans a borrower has to pledge his/her assets, like gold or property that they have as collateral to get a business loan. If an existing company wishes to take loan for any business purpose, it can pledge any of its assets to acquire the loan. For borrowers with bad credit score, this is the best way to increase their loan approval chances at better rates.

Loan against Fixed Deposit: Under this type of loan, If you have a fixed deposit with a bank. They will offer a loan that is up to the fixed deposit amount maintained in the account.

Business credit card: When compared to a loan, this is easier to get.  This is similar to the concept of a line of credit for small business owners.

Apply with NBFCs: The best sources that you can approach for a loan with a bad credit score are NBFCs. This is because, unlike other banks NBFCs place more importance on the operating history and strength of your business rather than solely focusing on your credit score. They can be borrowed without any collateral but are offered at higher interest rates.

Other ways to increase your business loan eligibility:

  1. Have a check at your credit score.
  2. Be thorough with your business plan. Have a clear understanding of your business goals and the type of loan that suits well for your business.

  3. Keep all necessary documents like bank statements, business documents such as certificate of registration, final statements like Profit & Loss A/c, Balance Sheet, clients and customers details in place. 

  4. Research on your borrowing option.

A bad credit could be a result of many factors such as past dues, late payments, settlement, foreclosure, errors on credit report, etc. You should put efforts to resolve any such issues and improve your credit score to become eligible for business loans from banks.