Everything You Need to Know About the Ideal CIBIL Score for Business Loan

When individuals apply for a Home Loan, the first thing that a lender does is check their CIBIL score to gauge their repayment capacity. The CIBIL score is a three-digit number ranging between 300 and 900 that denotes an individual's creditworthiness and repayment capacity.  

An individual's CIBIL score is calculated based on several factors, such as the individual's current income and debt ratio, past repayment behaviour, and the responsibility with which they use credit. So, what is the ideal score one should maintain to be able to borrow a Home Loan or any other loan at favourable terms? Potential borrowers should maintain a credit score of 750 and above to be eligible for a loan.  

A CIBIL score is one of the key factors that decide whether a lender will sanction or approve a business loan for a company. In this article, we discuss everything about CIBIL scores for business loans. 

What is a Company Credit Score?

Like individuals have a credit score, companies also have a credit score called the company CIBIL score. The company CIBIL score indicates a company's creditworthiness and is calculated based on various parameters, such as a company's financial health, payment history, and existing debt. Lenders obtain this score from the company's credit report, which contains other information as well.  

A company's credit report gives background details about a company, such as the name of the parent company, year of establishment, and existing subsidiaries. The company credit report also mentions the company's CIBIL score. Depending on your preferred credit agency, your company's CIBIL score will vary between 300 and 900. Borrowers should know that if their lender obtains their company's credit report from TransUnion, the credit rating will vary between 1 and 10, with 1 being the highest credit rating a company can get. However, if a lender chooses to go with CRIF High Mark India, the company credit rating will vary between 300 and 900, with 900 being the highest score a company can get.  

Also Read: Everything You Should Know About Your CIBIL Score 

Now that we know what a company's CIBIL score is, let us look at the importance of this score and understand why lenders check this score before deciding on any business loan application.  

How is CIBIL Score Important for a Business Loan?

Before we can answer this question, let us look at the factors that affect a company's credit score. Developing an understanding of these factors will also allow us to understand why the CIBIL score is important for business loans.  

The company CIBIL score or the company credit report (CCR) is indicative of a company's financial health and repayment capacity. Lenders assess a company's financial health based on its current income, current sales, existing debt, etc. The CCR allows a lender to understand whether the company will be able to repay the loan that it wishes to avail of and if lending funds to the company would involve risk. 

When it comes to businesses, a company's assets including land, factory stores, machinery, vehicles, etc., play a key role in deciding if a company should be sanctioned credit. Having a high number of assets increases one's chances of obtaining credit on favourable terms. The company CIBIL score also tells lenders about the assets that a company has.  

The CCR also discloses various financial ratios of a company, such as gross profit margin, return on sales, liquidity, and leverage inventory. These financial ratios also help lenders assess a company's financial health and ability to repay the loan.  

A company's CIBIL ratio also depicts its payment history. You may have availed of multiple loans when running a business. In such cases, lenders can focus less on the number of loans taken previously and more on the repayment history — specifically, how many loans have been successfully repaid and how many are yet to be repaid. The CIBIL score for business loans is important as it indicates if a company has cleared loans on time and can be trusted with future repayments. 

Read Also: Tips to Help You Improve Your CIBIL Score 

Lastly, a company's credit report also shows how old or new the company is. Old companies have had the chance to build their repayment history and credit score and can be considered more reliable. Therefore, lenders may sanction loans to old companies more easily than they do to new companies. 

In conclusion, the company CIBIL score is important as it provides lenders with comprehensive insights into the company's creditworthiness before approving a loan. The next question now is how to maintain an ideal score for a business loan. Read on to know the answer.  

What is the Ideal Score for a Business Loan?

When applying for a business loan, ensure you have a high CIBIL score to avoid rejection and prevent decreases in your credit score, which can affect future loan eligibility.

To be able to avail of a business loan, companies should have a credit score of 750 or above. If the company's credit score is between 600 and 750, your company may get approved for a business loan but this loan will be extended on less favourable terms. If your company credit score is under 600, your business loan application will most probably get rejected. 

How to Maintain an Ideal Score for Business Loans?

You can maintain an ideal CIBIL score by practising the following: 

1. Always Pay All the Bills on Time

When individuals miss EMI payments, their credit rating takes a hit. Similarly, a company's credit rating also decreases when the company misses its EMI deadlines. Missing too many EMI payments leads to a low credit score, which in turn, reduces a company's chances of availing of credit in future. Thus, to maintain a good credit rating, companies should always pay dues on time. 

2. Keep Your Credit Utilisation Ratio Low

Yet another easy way to maintain a high credit rating is to keep your credit utilisation ratio on the lower side. A low credit utilisation ratio not only helps in maintaining a healthy credit score but also demonstrates responsible financial management to lenders.

3. Take Loans Only if Necessary

Owing to several expenses, company owners can rely on loans to meet business requirements. However, one should take a loan only when necessary. This will help in maintaining financial health by minimising debt obligations.

4. Take a Small Loan and Pay it Off Diligently

If you need a substantial business loan but your credit score is low, you can try improving the score by availing of a small loan and paying it off responsibly. This will also help you get approved for a loan at favourable terms. 

5. Do Not Close Old Loan Accounts

When a business closes a loan account, its entire credit repayment history is deleted. Thus, in the absence of old accounts, a business has no credit history and hence, no credit score or report to show. Therefore, businesses should not close old accounts and company credit cards. 

6. Get Errors Rectified Quickly

Sometimes, a company's credit score may decrease because of errors made by other companies and institutions while reporting financial statements. Therefore, companies should check their credit report regularly for errors. If you see any errors, report those to a credit agency immediately. Know that rectification takes some time to reflect on a credit report.

Read Also: Know How Mortgage Loan Affect Your Cibil Score 

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