.gif)
.webp)
.svg)
Whether you are a Fortune 500 company, a startup or a small enterprise, financial solutions like loans play a vital role in various business functions. Loans can support your business's day-to-day operations or expansion by opening new branches or increasing capacity.However, the fate of your loan application typically boils down to one number - the CIBIL score . Let us explore CIBIL scores, why they are important for businesses, and how to improve them.
What is a CIBIL score?
CIBIL scores are calculated on credit behaviour, that is, your credit payment history across all types of loans from various lenders over a specific window of time. Banks and financial institutions view your CIBIL record before approving a loan application to ensure repayment capabilities.CIBIL scores range from 300 to 900, where 300 is the minimum or the worst CIBIL score and 900 is the maximum or the best CIBIL score. A good credit score range in India is typically between 650 and 750. Anything above 750 is considered excellent.
Who issues CIBIL scores?
TransUnion CIBIL, an RBI-licensed credit bureau, provides CIBIL scores. It maintains credit records of over 100 crore individuals and businesses. A CIBIL-issued credit score gives banks, non-banking financial companies and housing finance companies an insight into potential borrowers and their credit history. This helps financial institutions decide whether to provide loans to individuals and companies.
How to check your CIBIL score?
You can check your CIBIL score by following these steps:
- Visit the official CIBIL website and log in using your credentials
- Access the dashboard and generate your CIBIL score. You will get your corporate CIBIL report.
You can revise your CIBIL score once every year.
Importance of CIBIL score for Business Loans
Banks and financial institutions rely on CIBIL scores to understand whether it is safe to lend you money. The terms of the loan, such as the interest rate and tenure, can also depend on your CIBIL score.To avoid any hiccups when getting a loan, you should ideally have a CIBIL score above 650. Similarly, when seeking a business loan , it is beneficial if the CIBIL score of all the owners, including you, is above 700. In addition to the CIBIL score of the individual owners, a lender may also consider the business' CIBIL score.CIBIL scores for businesses are similar to those of individuals. If your business avoids taking on too much debt and repays it without any delays, it will ideally have a good CIBIL score. A score of 700 is considered the required minimum CIBIL score for Business Loans.If you are a small business owner, it is imperative that you maintain a great credit score. Here's how you can do it.
How to improve your CIBIL score?
The first thing you should know about improving your CIBIL score is that it takes time. By incorporating some of the following habits, you can improve your CIBIL score in about six months to a year:
1. Be punctual about repayments
When you take loans and do not repay them on time, it gets recorded, which is how your CIBIL score gets negatively impacted. This is also why lenders might see you as a risky customer. Missing EMI payments can also lead to penalty fees, increasing the amount you have to pay and can affect the approval of any future loans.Similarly, you should be punctual when paying your Credit Card bills. This can help you avoid accumulating interest and eventually improve your CIBIL score.
2. Avoid overloading debt
When you take on too much debt, be wary of the interest payments, as they can be a setback to important financial goals. You probably already know that interest earns interest. Thus, when you have too much debt and are unable to repay it, your debt can snowball into something humongous.This is true for both individuals and businesses. It is also why banks and financial institutions avoid giving loans to people and businesses with too much debt.
3. Maintain Credit Cards
If you have Credit Cards and use them often, make sure your clear your bills on time. It can help you build a credit history that is long and free of delays. Maintaining healthy credit card usage can improve your CIBIL score over time and project you as a responsible borrower.
4. Consider longer tenures when taking a loan
Usually, longer loan tenures result in lower EMIs, making it easier to repay the loan. Additionally, it helps create a long credit history. Thus, a longer-tenure loan also offers the chance to improve your CIBIL score. However, it is important to remember that longer tenures also mean paying more in interest in the long run. So weigh your options, and consider your current expenses and future financial goals when making this decision.
5. Mind the credit utilisation ratio
Your credit utilisation ratio is a percentage that is calculated by dividing the amount of revolving credit you use by the total credit available. If your credit utilisation ratio is close to 100%, it means that you are using nearly all the credit that is available to you. Lenders prefer a low credit utilisation ratio, as it shows you can take on more loans.You can improve your credit utilisation ratio by reducing the debt you owe and increasing your credit limit. For instance, you can increase your credit limit by asking your lender to increase the limit on your existing accounts or by getting a new Credit Card.
6. Check your CIBIL report for errors
It happens rarely, but CIBIL can make mistakes while updating your credit records, which can affect your CIBIL score. So, check your CIBIL report for errors or fraud, and if you find any, report them to CIBIL. Accordingly, your CIBIL score should improve.
7. Choose different forms of credit
As your CIBIL score is based on your credit history, remember that if you rarely borrow money, your credit history will be shallow and your score quite low. This is because, to lenders, you will be a new customer they do not know much about.By making smart choices and opting for a mix of secured and unsecured loans of different sizes and tenures and repaying all this debt on time, you can develop a reputation as a good borrower, which will reflect in your CIBIL score.Did you know that you can improve your credit score by simply taking out a Personal Loan? Click here to know more .
Key Takeaway
- CIBIL scores are three-digit numbers ranging from 300 to 900 that help lenders understand a person or business's ability to repay debt.
- When it comes to Business Loans, the CIBIL scores of all the owners, and the CIBIL score of the business itself, affect whether a Business Loan application gets approved.
- It takes patience and diligence to improve your CIBIL score - it can not be done overnight.
- A lengthy credit history, free of delays in repayments, reflects well on your borrowing history and positively affects your CIBIL score.
FAQS - FREQUENTLY ASKED QUESTIONS
What is the CIBIL score required for a Business Loan ?
When applying for Business Loans, all the owners of the company and the business itself must have a CIBIL score over 700. It indicates responsible and less-risky borrowers, increasing your chances of loan approval.
Can I get a Business Loan if my CIBIL score is low ?
If you have a low CIBIL score, getting your Business Loan application approved might be more difficult. However, if the business itself and other owners of the business have high credit scores, there is a chance that you can still get the Business Loan approved.
Can your credit score affect your Business Loan eligibility ?
When deciding whether to approve a Business Loan, lenders will consider the personal credit scores of all the owners, as well as the credit score of the business.
Do Business Loans show on personal credit ?
If you are a sole proprietor, you are personally liable for any Business Loans you take. In this case, any Business Loan you take will impact your credit score.
Is my business credit score different from my credit score ?
Your credit score and your business's credit score affect each other only if you are the sole proprietor of the business. Your credit score is an indication of your ability to pay back debt, while your business credit score measures your business's ability to repay debt.
What is a CIBIL score in India ?
A CIBIL score reflects the loan repayment capability of borrowers in India, helping lenders reduce the risk of default.
What is the maximum CIBIL score attainable ?
The maximum CIBIL score attainable is 900.
Is CIBIL a government or private organisation ?
The CIBIL score system is operated by TransUnion, a private organisation.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
