How Business Loan Affect Your CIBIL Score How to Improve It _Banner_WC


How Business Loan Affect Your CIBIL Score & How to Improve It _WC

6 min 28 Mar 2023
  • Ways in Which a Business Loan Can Affect a Person’s CIBIL Score
  • Simple Tips on How Business Owners Can Increase their CIBIL Score

No business can survive without registering continuous growth. Businesses need money to remain operational as well as to put into practice ideas that will eventually make them self-sufficient in terms of funds. Similarly, investors 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 and hasn't achieved self-sufficiency, arrange funds to achieve growth? The answer is business loans.

A business loan is a type of unsecured loan under which a borrower sanctions money that companies can use to fulfil their professional needs and commitments. Banks and NBFCs grant these loans to privately held companies, partnership firms, self-employed people, shopkeepers and sole proprietors.

In India, lenders offer primarily three different types of business loans.

Term Loans: These loans can be both secured and unsecured and therefore, repayment tenor for these loans stretches up to 17  years or so. Term loans usually cover capital expenditures.

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

Start-up Loans: Lastly, many businesses also offer start-up loans. These loans are specifically designed to cater to the needs of a start-up.

To be able to avail of these loans, borrowers must meet the minimum CIBIL score for business loan requirements, which is between 750 and 900.

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

To start with, one must 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 most certainly 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 immediately 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 must make it a point to repay company loans on time as lenders also check business CIBIL scores and the state of the 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 must make it a point to never exhaust the credit limit on their credit card as doing so would portray them to be credit hungry and reduce their credit score. Ideally, borrowers must maintain a credit utilization ratio of 30% or below.

Limit New Credit Applications

Lenders are wary of credit-hungry borrowers and thus, for credit information bureaus any activity that shows a borrower to be credit hungry is a red flag. 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 show a borrower to be credit hungry and reduce their 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 have a higher CIBIL score.

Check Your Credit Report for Errors

Lastly, if you want to apply for a business loan, check CIBIL score in advance by making an application or writing to any of the four recognized credit information agencies. You will have to pay CIBIL score charges to be able to avail of your credit report. However, this is something you must do. Borrowers must check their credit reports for two reasons. 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 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 immediately.

Final Words

Setting up a business and making it grow requires one to have easy and 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 CIBIL score and then apply for a loan.


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