How a Business Loan Affects Your CIBIL Score and How to Improve it?

Sustained growth is essential for the success of any business. Businesses require capital to stay operational and implement ideas that drive expansion. Securing the necessary funds can be challenging for new companies still in the growth phase. One effective solution is leveraging business loans. 

A business loan is a type of loan that a company can avail of to fulfil its professional needs and commitments such as business expansion. To be able to avail of these loans at competitive terms, it can be beneficial to have a high CIBIL score, typically above 750. 

Business Credit Score vs. Personal Credit Score  

Understanding the distinctions between personal and business credit scores is essential for both individual and corporate financial health. Here is a comparative overview: 

Ways in Which a Business Loan Can Affect a Person’s CIBIL Score 

Here are some situations where a business loan can affect your personal credit score: 

1. Impact on Sole Proprietors: 

• If a business loan is taken in the sole proprietor's name, it directly affects their personal CIBIL score. 

• Timely repayment of EMIs as per the amortisation schedule improves the CIBIL score. 

• Missed EMIs or loan defaults can lower the CIBIL score.

2. Impact on Partnerships:

• When business partners jointly take a business loan, repayment behaviour impacts the personal CIBIL scores of all partners. 

• Consistent and timely repayments are essential to maintaining good credit scores for all involved. 

3. Impact on Limited Companies: 

• Business owners of limited companies maintain separate personal and company accounts. 

• Loans taken under the company’s name do not directly impact personal CIBIL scores. However, lenders may evaluate the business CIBIL score when business owners apply for other loans, such as personal loans or Loans Against Property.

Also Read: Easy Ways to Maintain a Good Business Credit Score  

Now that we understand the concept of business loan CIBIL scores, let us look at what individual borrowers can do to increase CIBIL scores. 

Working capital loans: These are loans that businesses can avail of to manage the shortfall in their cash during a specific season or month.

Start-up Loans: These loans can be availed of to cater to the needs of a start-up.

To be able to avail of these loans, it can be beneficial to have a high CIBIL score, which is typically between 750 and 900.

Simple Tips on How Business Owners Can Increase their CIBIL Score 

Pay all Credit Card Bills and EMIs on Time 

If you want to increase CIBIL score, the first thing that you must do is build the habit of paying all the credit card bills and EMIs on time. Your payment history is the factor that influences your credit score the most. So, make sure you have a clean payment history.

Do Not Exhaust Credit Cards 

Business owners who want to avail of a business loan in their name and therefore, want to increase their CIBIL score should not exhaust the credit limit on their credit card as doing so can reduce their credit score. Ideally, borrowers should maintain a credit utilisation ratio of 30% or below. 

Limit New Credit Applications 

Whenever a borrower applies for a new loan, their chosen lender contacts a credit rating agency to get information on the applicant and how they handled credit in the past. Every time a lender enquires about an applicant, the query gets added to the applicant’s credit report and is known as a hard enquiry. Too many hard enquiries reduce the borrower's credit score. 

Maintain a Healthy Credit Mix 

Credit information agencies check a borrower’s ability to handle different types of credit before assigning them a loan. Thus, borrowers who have a balanced mix of secured and unsecured loans may have a higher CIBIL score. 

Check Your Credit Report for Errors 

Lastly, if you want to apply for a business loan, check your CIBIL score in advance by making an application or writing to any of the credit information agencies. You will have to pay CIBIL score charges to be able to avail of your credit report. Once the report is received, borrowers should check their credit reports for two things. First, on checking their CIBIL report, if they realize their credit rating is not as good as it should be for a loan and they need to increase their CIBIL score, they can take corrective measures in time. Second, while checking the report, if they find any errors that are negatively impacting their credit rating, they can report the errors and get them rectified. 

Final Words

Setting up a business and making it grow may require quick access to funds. A business loan can help you avail of the funds you need. However, such a loan can prove helpful only if you meet the minimum CIBIL score for business loans set by your chosen lender. If you do not, use the tips mentioned in this article to increase your CIBIL score and then apply for a loan. 
 

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