Business loan

How are a business loan and your credit score related?

If you are an entrepreneur, you must be knowing how a business loan becomes a necessity at various stages of the functioning of a business. Whether it is a small, medium, or large enterprise, you require loans of varying volumes. Your credit score can get affected by the loan to some extent and influence your future loan eligibility. Read on to learn the reasons behind it.

Understanding the concept of a credit score is important before finding out to what extent it is related to business loans.

Personal credit score

It is a rating that is calculated by rating agencies like CIBIL. The standard range is between 300 to 900. Most lenders prefer a score of 750 and above for approval of a loan and the score is one of the most important among the eligibility criteria. A bad score can reduce your chances of getting further loans. Even if you manage to get a loan, you may be marked as a risky applicant and will have to pay a higher interest rate during repayment.

Company credit report

This report reflects the credit history of a business or organisation and is prepared on the basis of data provided by lenders pan-India. It is not a score but a report. Lenders consider this also during approval of loan applications. Maximum lenders would also scrutinise the business credit score.

Lenders would consider your credit score for approval of your loan application unless in some instances when you are an existing client. Factors that can affect the score and alter the lender’s decisions include:

Proprietorship business

In this type of business, your personal credit score is the same as the business credit score, the reason being that the business owner and his business are considered the same entity. You are responsible for any loan taken in the name of the business. If there is an ongoing loan for this business and you default on any of the EMIs (equated monthly instalments), it would affect your credit score and also your further chances of getting further business loans.

Partnership organisation

If you are in a partnership company, where you are one of the partners along with two or more others, it is equivalent to a proprietorship organisation. Lenders would consider your personal credit scores to decide on the disbursal of a loan or on the extent of a loan.

Limited company

In the case of a limited company, the business is a separate entity from its owner, directors, and shareholders. It is like a corporate. These individuals are usually not held responsible for any loan that the business may require. Still, the lenders may check the personal credit scores during loan approvals.

Business loan low-interest rate

Credit scores and business loans are related but there is one more aspect of business loans that are affected by the scores. If you have a high credit score, you can also negotiate with the lender for a lower interest rate.

Since credit score is important for future loan disbursals, you should try to maintain a good credit score. You can adopt the following measures for this:

Avoid defaulting on repayments

Defaulting on the payment of EMIs would have a negative effect on your personal credit score, so avoid it as much as possible. Check for pending payments, for example, every month or quarterly, whenever it is due. 

Take loan as per affordability

Apply for an amount of loan that you can repay back comfortably from the revenues of your business. Take care to see that the loan amount does not exceed the amount of revenue that you earn consistently or expect.

Avoid taking multiple loans

If you take multiple loans at the same time, it may be difficult to repay back all of them at the same time or you may not remember the due dates. Take care not to default in the process as it would negatively affect your credit scores.

Avoid long repayment tenures

Lenders usually consider the repayment tenure of a loan and associate a long repayment tenure with a bad credit score. Keep this in mind while you apply for a business loan. The credit score is an important factor as it influences the business loan and the associated interest rate during repayment. As a business owner, you have to go through these points when you apply or have an ongoing loan as they can affect your financial reputation in the future.

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