When starting or expanding a business, financing is one of the most critical factors to consider. There are many types of loans available to business owners, but lenders often rely on credit scores to determine whether a borrower is a good risk.
This blog discusses what a good credit score is for a business loan, how it helps in securing a loan, and some examples with numbers to illustrate the importance of credit scores.
What is a good credit score for a business loan?
A good CIBIL score for a business loan is generally considered 700 or above in India. This score is based on a range of 300 to 900, with 900 being the highest. However, different lenders have different criteria for what they consider to be a good credit score.
For example, some lenders may require a minimum credit score of 750, while others may be willing to lend to borrowers with a score as low as 650.
The credit score is based on several factors, including payment history, credit utilization, credit history length, and credit mix. Payment history is the most crucial factor, representing the borrower’s ability to repay debts on time.
Credit utilization is also important, as lenders want to see that borrowers are not using too much of their available credit. Credit history length is another important factor, as it shows lenders how long the borrower has been using credit. Finally, credit mix refers to the borrower’s various credit accounts, such as credit cards, loans, and mortgages.
How does a good credit score help in securing a business loan?
A good credit score is essential for securing a business loan because it demonstrates to lenders that the borrower is low-risk. This means that the borrower is more likely to repay the loan on time and in full, which is attractive to lenders.
A good credit score can also help borrowers get better loan terms, such as lower interest rates and longer repayment periods. For example, suppose a borrower with a credit score of 700 applies for a business loan with an interest rate of 10% per annum.
In that case, they may be able to negotiate a lower interest rate of 8% or 9% if they have a credit score of 750 or above. This may not seem like a significant difference, but it can add up over the life of the loan.
For instance, let’s say the borrower takes out a loan of Rs. 10 lakhs with a repayment period of five years. At an interest rate of 10%, they would pay Rs. 12,75,000 over the life of the loan. However, if they could negotiate a lower interest rate of 8%, they would only pay Rs. 12,13,000, a savings of Rs. 62,000.
Examples of how credit scores affect business loans
To illustrate the importance of credit scores, let’s look at some examples of how different credit scores can affect the terms of a business loan.
Example 1: Borrower A has a credit score of 650 and applies for a business loan of Rs. 5 lakhs with a repayment period of three years. The lender offers them an interest rate of 12% per annum. If Borrower A were to take out this loan, they would pay a total of Rs. 6,78,960 over the life of the loan.
Example 2: Borrower B has a credit score of 750 and applies for the same loan as Borrower A. The lender offers them an interest rate of 9% per annum. If Borrower B were to take out this loan, they would pay a total of Rs. 6,24,000 over the life of the loan.
As we can see from these examples, Borrower B, with a higher credit score, would pay a significantly lower amount over the life of the loan than Borrower A. Borrower B is considered a lower-risk borrower, and the lender is willing to offer them better terms.
In conclusion, having a good credit score is essential for securing a business loan. A good CIBIL score can help borrowers get better loan terms, such as lower interest rates and longer repayment periods. In contrast, a low credit score can result in higher interest rates and less favourable loan terms.
Lenders consider credit scores an important factor in determining a borrower’s creditworthiness. Therefore, borrowers must maintain a good CIBIL score by paying their debts on time, keeping their credit utilization low, and managing their finances responsibly.
To apply for a business loan, an individual must check their credit score first. This can be done by obtaining a credit report from any of the major credit bureaus in India. If the credit score is below what lenders consider a good credit score, steps should be taken to improve it before applying for the loan. This increases the chances of approval and obtaining the most favourable loan terms.
Tata Capital is a well-respected lender that provides business loans to borrowers with good credit scores. If an individual meets their credit score requirements, it is recommended that they consider applying for a loan to assist in financing the growth and expansion of their business.