One of the essential parameters that is used to assess your creditworthiness is your credit score. It is the first step for financial institutions to conclude whether an applicant can be lent money in today’s banking structure.
If you have a business, your credit score can have an impact on your business borrowings.
So, how do you know your credit score? In India, four companies are authorized to evaluate an individual’s past financial transactions and provide a credit rating based on financial habits. TransUnion CIBIL is our country’s most popular credit score rating, also known as the CIBIL score.
What is a Good CIBIL Score?
A credit score is a numeric score based on a person’s credit history, typically ranging from 300 to 900, but it can vary a bit depending on the organization providing the data.
This data is collected from licensed agencies on individuals and is considered to be highly confidential. The only way to obtain this data is by going to the licensed agencies and submitting their PAN number.
A good CIBIL score is somewhere between 720 and 900. It is determined after undergoing a comprehensive study of a person’s credit behavior and history. A good credit score gives a loan aspirant several benefits, including quick loan approval, a higher loan amount, and a lower interest rate.
CIBIL Score Range
Below is the chart with the CIBIL score range and the chances of getting a loan approval. It will help you understand the minimum credit score required for loan eligibility.
|CIBIL Score||Creditworthiness||Approval Probability|
|<600||Immediate action is needed||Low|
|600 – 649||Doubtful. Subject to underwriting||Difficult|
|650 – 699||Satisfactory||There are possibilities|
|700 – 749||Good||Good|
|750 – 900||Excellent||Very high chances|
Benefits of a Good CIBIL Score
A good credit score always has multiple benefits. If you are aspiring for a loan, you should know what a good CIBIL score can help you achieve.
Higher chances of approval
If you have applied for a loan, the lender will first pull out your CIBIL score. This is called a hard inquiry, and your CIBIL score takes a hit when such an action is undertaken. The action can be adverse if your loan application is rejected.
However, if your CIBIL score is good, your chances of getting the loan increase. It is all because of the good repayment history of your existing loans and an excellent credit track record.
A good CIBIL score may also highlight that you have your loans within the boundaries of your repayment capacity and that all the earlier loans you repaid were on time with no delays.
Higher loan amount
A good CIBIL score means you are a responsible borrower. Hence, the lender will be willing to offer you a higher loan amount or a higher credit limit, provided you are willing to take it.
Lower interest rates
This is perhaps the best benefit that a good CIBIL score offers. Lenders always charge interest on the probability of defaulter. If your credit score is good, it means you have high creditworthiness and have been paying your EMIs on time and regularly. The chance of default is minimum, and hence the reward is in the form of low-interest rates.
How does your CIBIL Score impact your Business Loan?
It is a misunderstanding that a business and an individual are separate entities; hence, personal credit scores have no bearing on business borrowings. However, it is only sometimes true.
Let us explore how your personal credit score can impact your business loan.
Every business is established by a person or a group of people. Legally speaking, a business entity is always different from its owners.
However, when you start a business, it is still in its nascent stage and would have no financial statements to back up its creditworthiness. So, if there is a requirement for a business loan, the lender would always fall back on the owners’ credit score to make a decision.
There can be another instance when the business is operating successfully, but the financials provided are insufficient. Hence, the lender can rely on the financials and CIBIL scores of the owners to decide on the fate of the business loan.
Even if you are seeking a business loan from a bank that is otherwise not your parent bank, the lending bank can always seek the CIBIL scores of the people associated with the business to assess the credibility and for better decision-making.
The forms of business that determine if your CIBIL Score is important
Business has different types of forms. Based on that, your personal credit score can directly or indirectly impact your chances of availing of a business loan.
Sole proprietorship: Here, the business entity and the owners are one and the same. Hence, if you want to avail yourself of a business loan, the lender will always consider the owner’s CIBIL score.
Partnership: This business formation is an extension of a sole proprietorship with multiple owners. However, if your firm were to seek a business loan, the credit scores of all the partners would be checked by the lender.
Private or public limited companies: These are separate business entities and differ in scope compared to proprietorship or partnership firms. Hence, the stakeholders’ personal CIBIL scores do not impact decision-making when underwriting a business loan by the lender.
No matter what you do, however good your finances are, if you do not have a good CIBIL score, it will always affect your credit rating. Even when you are seeking a business loan, a decent CIBIL score is a must.
So, if your credit score is unsatisfactory, strive to improve it by paying all your monthly dues on time and clearing your outstanding bills. You will get the required leverage from your lender if the score is good.