How Business Loans Affect Your CIBIL Score and How to Improve it?

No business can survive without registering continuous growth. Businesses need money to remain operational as well as to put into practice the ideas that can make them self-sufficient in terms of funds. Similarly, investors may also want to invest in companies that are continuously growing. The question is how does a new company, which is still in the growth phase, arrange funds to achieve growth? The answer can be business loans.

A business loan is a type of loan that companies can use to fulfil their professional needs and commitments such as business expansion. Lenders grant these loans to individual and non-individual borrowers.

The types of business loans include:

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.

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

To start with, one should understand that a business loan will affect an individual’s personal CIBIL score if the individual has availed of a business loan in their name. In this case, i.e., if the borrower is the sole proprietor of the business and has availed of a business loan in their name, the loan and how they pay it will have a direct impact on their CIBIL score. If the borrower uses credit wisely and repays the loan on time as per the amortization schedule provided to them, their CIBIL score will increase over time. Conversely, if they miss EMIs or default on loan repayment, their credit score will go down.

If a business is owned by two or more people, i.e., there is a partnership between two people in terms of the business and the partners take the business loan together, how they repay the loan will influence both of their CIBIL scores. However, in the case of a limited company, the business owners maintain separate personal and company accounts. In this case, loans are availed of under company accounts and do not impact the business owners’ CIBIL scores. However, business owners of private companies should repay company loans on time as lenders check their business CIBIL scores. They check the type of business loans availed under the company name when such business owners apply for other loans, such as a personal loan or a Loan 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.

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 don’t, use the tips mentioned in this article to increase your CIBIL score and then apply for a loan.

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