If you’ve applied for a business loan before, you know how important your credit score is to the outcome of your request for funds.
Most lenders use your credit/ bureau/ CIBIL score as an indicator of how trustworthy you are and how well you handle your finances. CreditEnable’s lender partners prefer to lend to businesses with a credit score of 750 and above. But consistently maintaining a high credit score is not always possible for every SME. That is why many NBFCs now use other factors, in addition to your credit score, to make their final lending decision.
So, while getting business funding with a low credit score can be tricky, it’s not impossible.
What is a credit score and why is it significant?
Your credit score is a three-digit number lenders use to help them decide how likely you are to repay a loan you borrow from them. It is an important factor in your financial life. Your score can range from 300 – 900, and a credit score of 750 and above is considered desirable. The higher your score, the more likely you are to qualify for business loans and credit cards at favourable terms, which will save you money.
Credit scores are categorized in the following manner:
- 300 – 550 – Poor
- 550 – 650 – Fair
- 650 – 750 – Average
- 750 – 900 – Good
If your credit history is not where you want it to be, the good news is you can work on it. Improving your credit score will take some time, but the sooner you address the issues that might be dragging it down, the faster your credit score will go up. Some things you can do to improve your score are paying your bills on time and keeping your credit utilization ratio low.
Can I get a business loan if my credit score is low?
Though it may be tricky to get a business loan from a traditional lender when your credit score is low there are other formal avenues of funding available to you.
As businesses and lenders in India begin to digitize, more reliable financial data is generated about your business. Thanks to this data, many NBFCs (Non-Banking Financial Companies) authorized by the RBI have now started using unconventional data points to help assess a business’s creditworthiness.
So, if your credit score is low, you can s apply for business funding with an NBFC. Or you can consider applying for secured business funding with a traditional lender in exchange for collateral.
What are the business funding options available to me if my credit score is low?
If your credit or bureau score is low, you can explore the following options for business funding:
1. Apply for a secured business loan:
If you own assets that you can use as collateral, pledge them to get a secured business loan from a lender. Due to your low score, the loan terms may not be the most favourable, but since the lender has some guarantee from you, they will still be willing to lend to your business, knowing they can recover their losses in other ways if you default on your loan.
2. Accept a higher interest rate:
Despite your low credit score, some lenders may still offer you a business loan with a high interest rate. Accepting this high ROI business loan may be a good option as it will do two things:
- Show lenders that there are other lenders who see merit in your business plan and are willing to lend to you despite the low credit score.
- Getting this loan and paying your EMIs on time will help you eventually improve your credit score.
3. Apply with an NBFC or lender who doesn’t only use the bureau score to determine creditworthiness:
As mentioned above, some lenders now use other factors in addition to your bureau score to make their lending decision. Therefore, for such lenders, your credit score then becomes less important. If all other factors indicate your business is doing ok and is not in a cash crunch, these lenders may be willing to lend to your business.
4. Request your current lender:
Since you already have an existing relationship with your current lender, and they understand your business finances and spending patterns, you can approach them about another business loan or ask for a top-up on the funding you get from them.
5. Access an overdraft facility with your lender:
Lenders usually do not check your credit score when extending an overdraft facility. Using an overdraft for your business may be a good idea because you’re only charged interest on the amount you use within the sanctioned limit, and it helps you build your credit history and improve your credit score.
6. Apply for invoice discounting or factoring:
Invoice discounting or factoring is a popular form of working capital used by many SMEs. An easier way to understand it is getting a short-term business loan using your invoices as security. Since the lender knows you have accounts receivables that will be paid soon, they are willing to lend to you, knowing you will have the money in the near future to pay them back.
How can I improve my credit score?
The higher your score, the more favourable the loan terms lenders will offer you. These can include lower interest rates, longer repayment periods, and even a higher loan amount.
So, while a low credit score is not ideal, but you can take the following measures to improve it:
- Pay your bills and EMIs on time. This helps you avoid fines and maintain a good record on your credit report.
- Don’t overuse your credit cards. When you apply for funding, lenders look at your Credit Utilization Ration (calculated by adding all your credit card balances at any given time and dividing that amount by your total credit limit). This tells them how reliant you are on credit, so keep your credit utilization ratio at 30% or less.
- Don’t discontinue the old credit cards that you may no longer use.
- Only apply for more credit when you need it.
- Check your credit report regularly so you can catch any inconsistencies to dispute them before they damage your creditworthiness.
How do I know if I’m eligible for a business loan?
As credit experts, we advise our SME customers to only apply for the business loans they are eligible for.
If you aren’t eligible for a business loan and apply directly with a lender, they will conduct their credit assessment, check your credit report, and reject your application. When a lender pulls your credit report, it is called a Hard Inquiry, and these get recorded on your credit report. If they pull your credit report and then reject your request for a business loan, it can negatively impact your future loan prospects as other lenders you apply with can see this pull and begin to wonder why that lender didn’t lend to you.
The quickest way to check your eligibility for a business loan is by checking your bureau score. You can request a copy of your credit report from the credit bureau yourself, or you can use CreditEnable’s technology platform to check your loan eligibility for free.
When CreditEnable checks your score, it is called Soft Inquiry, and it has no impact on your credit report. If your Experian score meets our lender partner requirements, we’ll tell you upfront and help you procure the business funding you need.
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