Businesses need a constant inflow of cash to keep up with their operations, growth and expansion. Small and medium businesses, however, may not have enough cash flow or profits to use for their operations. So, they approach the banks for a business loan. Banks will check the credit history of these businesses to see if they can qualify for a business loan. A bank loan for a low credit score is almost impossible, which is why these SMEs (Small and Medium Enterprises) have to resort to other types of financing to fulfill their credit requirements.
In India, a few credit information bureaus issue and monitor the credit scores of individuals and businesses. The most popular of these bureaus is the Credit Information Bureau Ltd. (CIBIL). A credit score is in the range of 300 to 900, with 300 indicating low credit reliability and 900 indicating excellent credit reliability. The credit score needed for business loans for SMEs is usually 750 and above. This score indicates that the businesses pay their credit cards on time and haven’t defaulted on any payments in the past.
The credit score for business loans not only helps businesses to become eligible for loans but also helps businesses negotiate with banks for better deals on interest rates and repayment terms. When the credit score needed for a business loan is at least 750, it indicates that the borrowers (the SMEs) are financially responsible and that they will not default on repayment of their business loan.
A credit score for a business loan is, therefore, very important for businesses, as it is a direct reflection of their:
a) Financial health
b) Ability to get better credit terms in terms of lesser interest rates, easier loan process, quicker processing times and loan disbursals and more
c) Ability to negotiate for a higher credit limit from traditional financial institutions like banks, thanks to the impressive credit score of businesses
The credit score for business loans can be broadly classified into the following types:
Having a score of at least 750 and above is the best situation for businesses looking for loans to meet their credit requirements. This score indicates a reliable credit history for the businesses. When banks look at this score, they understand that the business has clean financials and has paid all its bills, credit cards and other utility expenses on time. This credit score for business loans indicates that the businesses are eligible for loans even from traditional banks. Businesses don’t have to approach other sources of financing for their needs, as they can get 100% of their funds from banks. With such an impressive score, they can also negotiate with banks to get attractive annual interest rates on their loans.
A score of less than 759 is not the ideal credit score needed for a business loan. However, a score in the range of 650 to 749 is not low enough for the banks to reject the loans. Businesses may still be able to get their loans sanctioned, but they may not get any additional offers like reduced interest rates, favorable repayment terms and more. For businesses with a score of less than 700, it might not be possible to receive full funding from banks. These businesses may have to resort to other options like invoice factoring, working capital loans, business equipment loan and more. They can take the help of Fintech companies like Finverv, to fulfill their credit needs through various options other than bank loans.
A business loan for a low credit score of less than 650 may involve stricter terms for the borrowers. When a credit score for a business loan is less than 700, it is not an ideal situation, as businesses with such low scores are considered to be high-risk options by lenders. Therefore, banks impose high interest rates and tough repayment terms on such businesses. Apart from this, businesses with a low score are also required to submit additional collateral to qualify for loans.
To conclude, businesses should always work on maintaining their credit scores in the range of 750 to 900, as it can help them get approved loans from banks at terms that are favorable to them.
Businesses, especially SMEs, should focus on the following techniques to improve their creditworthiness and credit score for business loans. An improved score increases their chances of qualifying for business loans from traditional banks at attractive interest rates.
a) Keeping existing debts as low as possible, and repaying the debts on time to denote financial responsibility
b) Using credit facilities minimally and managing finances properly
c) Having long-term business stability and a proper track record of credit history
d) Not approaching too many lenders for the same loan
e) Monitoring the scores regularly, and assessing transactions frequently to report fraudulent or inaccurate transactions (if any), as these may impact the score
f) Getting their businesses registered under the Companies Act to add more credibility to their operations
Businesses should always maintain their clean financial records, and repay all their previous debts to get a good credit ranking from the authorized credit bureaus. A good credit score for business loans will give SMEs the upper hand while applying for loans, which means they can enjoy quicker disbursals at attractive interest rates and repayment terms. This score is not just a number, but a complete and transparent, numerical representation of the financial health of a business. Hence, it is only natural that a business should do all that it can to maintain this score at the maximum level possible.