Businesses require frequent funding to run day-to-day operations efficiently. Whenever there is a cash crunch business loans come to the rescue. Working capital loans, cash credits, overdrafts, letters of credit, invoice financing, term loans, and machinery loans are some of the types of business loans.
A credit score is one of the important parameters in determining your eligibility to get a business loan. A credit score is a comprehensive score that gives deep insight into your creditworthiness and repayment capacity. The credit score along with profitability, cash flow, and liquidity play a major role in qualifying for a business loan.
What Is The Ideal Credit Score For A Business Loan?
- A credit score of 750 and above is considered excellent and you can get the required amount of business loan easily.
- However, a credit score between 680 and 750 is decent enough to get a business loan. The lenders will look into the financial standing of your business to gain confidence in your credit profile.
- A credit score below 680 is a bad credit score and the lenders will not be keen to offer credit.
Who Calculates Your Credit Score?
Credit bureaus Equifax, Transunion, CIBIL, CRIF, and High Mark
How A Credit Score Is Assessed?
The following are the factors used to determine a credit score.
Repayment History
The credit bureaus keep track of your monthly repayment of credit card bills and monthly EMIs. Even if you have missed your payment for one day, your credit score can come down by 100 points. The repayment history is the most important factor to determine your creditworthiness.
Credit Utilisation Ratio
Credit Utilisation Ratio is the measure to assess your revolving credit usage. It is arrived at by dividing your total outstanding credit by the available credit limit.
Credit Mix
The composition of secured and unsecured credit in your loan portfolio is called a credit mix. Though this has a low impact on your credit score, it is one of the factors for the assessment of creditworthiness.
Age Of Credit Lines
The tenure of the loan and your actual repayment period are compared to determine the age of your credit profile. If the repayment is proportionate to the actual loan tenure, the profile is considered good.
Credit Enquiries
The number of hard enquiries is also taken into account by the credit unions. The lender-initiated enquiries are called as hard. It means that you are credit thirsty. It has a significant impact on your credit score.
New Credits
Your recently purchased credit cards and other loans are also considered in determining your credit score.
The chart below represents how these factors are used to calculate your credit score.
After considering all the parameters, the credit score is reported as a number between 300 and 900.
How Is Credit Score Used As A Tool To Determine Loan Eligibility?
Given the factors and parameters used to calculate a credit score,
A credit score of 750 and above implies,
You are prompt in repaying all your debt obligations.
Your credit utilisation ratio is optimal. It is below 30%. It means you are seeking and using credit judiciously.
Your credit ageing, credit mix everything falls in line.
Your creditworthiness is established and the lender is sure that his money will be repaid regularly.
A credit score between 650 and 750 means
Your credit profile is not that attractive, but not risky. The lenders may prefer lending business loans at slightly higher interest rates. You can consider improving your credit score by settling the long outstanding dues if any and repaying on time.
A credit score below 650
Your credit file is bad. There are higher chances of your application being rejected. If the lender still wants to sanction he may do so by demanding collaterals and guarantees and charging higher interest rates and tougher repayment terms.
Benefits Of Having A Good Credit Score
- Instant loan approvals
- A healthy relationship with the lenders
- Attractive loan terms
- Easy access to credit cards
- Improved profitability and liquidity for the business
- Enhanced business performance
Conclusion
While getting a business loan can be quite a process, the ease and speed of getting it to depend purely on your credit score. A good credit score can give you the rank of a preferred borrower. Develop and maintain good financial discipline by repaying the dues on time.
FAQ of What is a Good Credit Score for Business Loan
1:Will my personal credit score be considered for a business loan?
A personal credit score is the measure of the creditworthiness of an individual. A business credit score is the measure of the ability of the business to meet regular obligations. In the case of sole proprietorship and partnership, the personal credit scores of the owners are also considered.
2:What is a bad credit score?
A credit score between 650 and 600 is doubtful and anything below 600 is treated as bad.
3:How can I improve my credit score?
You can try closing your higher outstandings first. Be regular in repaying all your EMIs and bills on the due date. Do not use your entire credit limit. Take steps gradually to improve your credit score.
4:How to make a soft enquiry about my credit score?
You can check your credit score for free and make a soft enquiry through credit Mantri.
5:Can I apply with a different lender if my loan application is rejected?
No. It is advisable to wait until 3 months after rejection. Frequent rejections can drag your credit score very badly.