Small Business Loan

Importance of a good credit score for small business loans

Every business, whether small or medium-sized, needs to avail loans from SME loan providers at some point in time to meet various business requirements. These requirements could be acquiring new machinery, upgradation of infrastructure or meet working capital needs. Being a small business, your cash reserves are limited, and it is not possible to put unnecessary strain on your working capital. But as the need for additional funds is urgent, there is no better option than getting a small business loan from any of the numerous MSME loan providers in India who offer SME loans without collateral. These financial institutions provide loans to businesses for a number of purposes as per your requirements. These loans could be secured as well as unsecured, depending on the proposed usage of funds.

Due to the turmoil going on in the finance sector as well as the strict attitude of RBI, most financial institutions have started following a stringent criterion for ascertaining your eligibility for a business loan. Only if they are completely satisfied with as all aspects of your loan application, would they process your application further. There are various parameters against which your application for a business loan is assessed, but one of the most important criteria is your Credit Score.

What is a Credit Score?

A credit score is a numeric representation of your creditworthiness based on a number of parameters and is calculated by various credit rating bureaus such as CIBIL or Experian. Your credit score is derived out of a total of score of 900 and is affected by multiple parameters such as: –

  • Number of running loans
  • Credit card utilisation ratio
  • No of hard inquiries against your credit profile
  • Loan amount overdue and many others.

Having a good credit score is important to impress the lender that you are a responsible lender and are unlikely to default on repayments.

How to maintain a good credit score?

Calculation of your credit score is based a number of financial parameters. Maintaining a good credit score is not a natural process and requires you to have a good fiscal discipline. Following are some of the steps that you must follow in order to have a good credit score: –

  • Pay your EMIs for running loans on time.
  • Always pay your credit card bills before due date.
  • Keep your credit card utilisation ratio below 30%.
  • Do not close old credit cards.
  • Never make too many applications for loans simultaneously.
  • Do not take loans unless absolutely necessary.
  • Try not to foreclose your loans.
  • If possible, you must opt for secured loans instead of unsecured loans.
  • Do not enter into a one-time settlement for a loan/credit card. Pay your dues in full.

Why is a good credit score decisive?

Importance of having a good credit score cannot be overstated. In the present times, it is the single most crucial eligibility criteria affecting your eligibility for business loans. Following points will help you understand the importance of having a good credit score: –

  • Lower interest rates

SME loan providers offer you the lowest rates of interest against business loans if your credit score is above 750. Such a high credit score signifies to the lender that you are a responsible borrower and are unlikely to default on repayments. As a result, the risk factor for the lenders is reduced, and they are able to offer your significantly low rates of interest.

  • Easy availability of credit

With a good credit score, the number of borrowing options for you is virtually endless. All SME loan providers are willing to offer you a business loan if your credit score is above the there specified threshold. This gives you the flexibility of choosing from the lender who is offering the best terms and conditions according to your requirements.

  • Scope of negotiations

With a good credit score, you have multiple borrowing options at your disposal. As such you are in a better position to negotiate with the lenders for lower interest rates. Remember that even a slight reduction in interest rates leads to significant savings in the long run. Also, you can negotiate for lower processing charges and file charges.

  • Higher eligibility

When your credit score is good, then the MSME loan providers would be willing to offer you higher amounts at lower rates of interest. This will eliminate the need to borrow from multiple sources as your requirements can be easily met from a single source of finance.

  • Future requirements

A good credit score ensures that any funding requirements in the future from your side can be met easily. Lenders are readily offering loans to applicants with high credit scores. This facility helps you plan your future growth activities effectively.

You need to make sure that your credit score at all times stays above 750. If it is below this level, then you must take professional help and work towards repairing it.