Capital is essential for businesses to run day-to-day operations, invest in R&D efforts, introduce new product lines, and expand into new markets. Commercial loans offer an easy way of raising capital for these requirements and plugging cash flow storages. However, to qualify for such loans, businesses must meet certain eligibility criteria, including a good credit score requirement. Banks and NBFCs thoroughly inquire into the creditworthiness of a borrower before approving a commercial loan request. Apart from assessing the business’s credit rating, lenders also assess the credit score of the proprietorship or primary applicant to ascertain the borrower’s reliability. A higher credit score indicates a more reliable borrower, which can help secure loans at a lower interest rate and favorable terms and conditions, and vice versa.
Understanding Credit Scores
A credit/lending score is a three-digit number ranging between 300 and 900 that sums up the borrower’s creditworthiness. Your creditworthiness score is derived from your credit history and calculated using factors like repayment history, credit mix, number of open accounts, credit inquiries, etc. Since commercial loans are mostly unsecured, lenders assess the business owner’s creditworthiness score to ensure the repayment probability and risks associated with the credit disbursal. Credit bureaus like CIBIL, Equifax, Experian, and CRIF High Mark provide individual credit rating scores in India.
Creditworthiness scores help the lenders make assessment of the risks associated with lending to the applicant. Since the lending score indicates the loan history, it makes for a good and reliable source of information. If the credit rating score is low that means the lending to the applicant may not be the safest decision, and vice versa. Lending score is also one of the determinants of the interest rates offered by the lending institutions. Hence, it is imperative to maintain good business lending scores.
Also Read: CIBIL Score for Business Loan, Check Minimum Credit Score
What is a Good Credit Score to Secure a Commercial Loan in India?
The specific lending score requirements for a commercial loan in India can vary depending on the selected lender. However, most banks and NBFCs prefer credit lending scores of 750 or more when approving commercial loan applications. The higher your credit lending score, the higher the chances of commercial loan approval.
Creditworthiness scores between 750-900 allude to the borrower’s enhanced creditworthiness. A high creditworthiness score suggests prudent financial management since creditworthiness scores are calculated after assessing factors like your credit utilization ratio, past repayment records, and debt payment behavior.. A high creditworthiness score gives you enough leverage to negotiate lower interest rates and longer tenures. Conversely, a creditworthiness score below 650 can result in more rigorous eligibility requirements and higher interest rates. It is recommended that the applicant maintain a minimum cibil score of 750 or above to secure loans more easily and that too at better rates and terms. There are multiple precautions that an applicant can take to ensure enhanced creditworthiness scores.
Breakdown of Different Credit Scores and Their Impact on Loan Approvals
Creditworthiness score is an important parameter which determines lending rate, and terms and conditions for the borrowers. The following table sums up how creditworthiness scores map a borrower’s creditworthiness and affect the lender’s approval decisions:
Credit Score Range |
What this Indicates About the Borrower |
Loan Approval Probability |
Things to Remember |
| 750-900 |
| Highly chances of loan approval | Lenders will easily sanction commercial loans.Also eligible for unsecured loans at nominal interest rates. |
| 700-750 |
| Good chances of loan approval |
|
| 650-700 |
| Fair chances of loan approval |
|
| Less than 650 |
| Poor chances of loan approval |
|
Understanding Corporate Credit Rating
When applying for commercial loans, lenders perform two types of credit checks. They check the lending score of the business owner to review the individual borrower’s creditworthiness and credit rank to review the company’s creditworthiness. Lenders generally assess a company’s Corporate Credit Report or CCR and evaluate its financial standing. Companies with a current credit exposure of Rs. 10 Lakhs- Rs. 50 Crores are assigned credit ranks by CIBIL.
Cibil CCR is a summarized record of the company’s credit history, past loans, credit utilization ratio, current debt obligations, number of credit inquiries made, etc. CIBIL sums up this CCR with a single credit rank that ranges from 1 to 10. Here, 1 represents the highest attainable rank with little to no default risk, while 10 represents high default risk. So, the closer your company’s CCR is to 1, the higher the chances of a commercial loan approval. A ranking over four is considered undesirable for commercial loans.
Also Read: 5 Best Financing Options for Small Businesses in India
Significance of Credit Scores on Commercial Loans
Here’s a list of ways lending scores impact on commercial loan approvals:
1. Lender Confidence
A higher lending score communicates responsible credit behavior, alluding to the borrower’s creditworthiness. Since, any lender would naturally prefer lending to applicants with low probability of default, a higher creditworthiness score really helps. This boosts the lender’s confidence in timely repayment, improving the chances of commercial loan approval. A higher lender confidence may allow you to secure lower interest rates and better lending terms for your business. Lender confidence can really come in handy in case the business wants to have a longstanding relationship with the lenders, having a long relationship can help secure favorable lending terms, and can see higher credit disbursements, in favour of the borrower.
2. Cost of Borrowing
Banks and NBFCs may be willing to sanction commercial loans to MSMEs with good lending scores against low interest rates. This significantly reduces the overall cost of borrowing, ensuring affordable access to capital for exploring growth opportunities. Risk and interest rates are directly proportional. In case of higher risk which is indicated by low lending score , the interest rates increase as it helps the lender mitigate the extra risk. Hence, cost of borrowing decreases in cases where the applicant has a good credit history and a high creditworthiness score. Hence it is essential to maintain a solid credit history, as it has a long standing impact on the future loans, its costs and the terms of borrowing which can be beneficial to fund future growth opportunities.
3. Loan Amount
Creditworthiness score also affects the loan amount sanctioned through a commercial loan. Since borrowers with a strong credit profile are less risky, lenders are more likely to sanction a higher loan amount to such borrowers. As creditworthiness highlights how safe or risky it would be for the lender to lend money to the applicant. In case of high creditworthiness score, the lender would be comfortable to approve a higher loan amount as the credit history indicates a positive credit behaviour, and vice versa. It is also essential to ensure that the loan amount applied for suits your requirement, over borrowing may result in undue repayment burden which can result in a dip in the lending score . Hence, the borrower must always apply for an adequate loan amount.
4. Negotiating Power
When discussing loan terms with the lender, a good creditworthiness score offers negotiation leverage to the borrower. Borrowers with a high lending score can secure better loan terms like lower interest rates, higher loan amounts, and flexible repayment terms. For businesses that clear the cutoff for minimum cibil score for business loans by a small margin, they may not be in a great position to negotiate better loan terms for themselves. Hence, it is important to maintain a healthy repayment history and a solid creditworthiness score.
5. Tips to Improve Credit Score
The importance of credit rating being good is really high if you wish to avail debt funding from lenders. However, there is a lack of awareness among individuals, around the reasons why creditworthiness score may take a dip and the steps that one should take. You can implement proactive measures to boost your lending scores and ensure easy commercial loan approvals. Here are a few tips you can implement to improve your creditworthiness scores before applying for a commercial loan:
- Timely Payments
Make prompt payments for existing loans, credit card bills, and vendor invoices to boost your creditworthiness score. Timely repayment of debts ensures a positive repayment history. This eventually helps massively in increasing the lending score, timely repayments indicate that the applicant has lower risk, which is another advantage since it helps in securing loans with lower interest rates.
- Reduce Credit Utilization
Credit utilization is the total credit used as a percentage of the total available credit limit. A higher credit utilization is an indicator that the applicant has a higher credit requirement in relation to their credit limit. Keep your credit utilization ratio below 30% of the available credit limit. A ratio above 30% may negatively impact your creditworthiness scores.
- Set-Up Trade References
Ask vendors and suppliers for trade references to indicate your creditworthiness based on past transactions. Reporting trade references can positively impact your creditworthiness scores. A business with good trade references shows stability in the business with respect to receivables, higher stability in the business indicates a safer investment for the lender, hence trade references can help as a supporting proof which enhances your eligibility.
- Avoid Multiple Credit Inquiries
Multiple inquiries indicate that the applicant requires much more credit that they are eligible for, and they are destitute for the same. This is a red flag for the lenders, as it may indicate that the applicant may not prove to be the safest lending option. Multiple credit inquiries for loans and credit cards within a short period of time can negatively impact your lending score. Back-to-back hard inquiries and rejections lower your creditworthiness scores.
- Build a Credit History
If your business is relatively new, you should focus on building a credit history. Availing small working capital loans and business credit cards and making timely repayments can help achieve this objective. A long and solid credit history highlights the fact that the borrower is reliable and has paid their dues on time in the past. Building a good credit history is a long process, however it is never too late to do so. You may start building a good credit history by perfecting your loan repayment i.e. not skipping any repayments, and taking smart decisions concerning borrowing.
- Monitor the Credit Report
Regularly monitor your creditworthiness score and the company’s CRR. This will give you regular insights on what is affecting your creditworthiness scores, and by what magnitude. Accordingly you can take relevant corrective measures to ensure that there is no further dip. It is possible for misreporting in your credit history. If so, move to correct any errors or discrepancies promptly.
Conclusion
Credit scores significantly impact commercial loan eligibility, interest rates, and approvals. Ideally, you should aim for a lending score of 700 or above to secure commercial loans on favourable terms. You may find some lenders with a minimum lending score requirement of 650 and above. It’s always prudent to first improve your creditworthiness scores and apply for commercial loans to avoid downsides like high-interest rates, poor loan terms, low loan amounts, etc. If you require immediate funding, consider applying with a creditworthy business partner or availing of secured invoice finance against high-valued unpaid invoices. Or you may also opt for a credit line, how credit line works is that the lender carves out a credit limit proportional to the risks associated and the credit limit of the borrower. The borrower, as per their needs can withdraw money from their line of credit. The biggest advantage is that the applicant does not have to apply for fresh loans on a repeated basis.
A good creditworthiness score will also enhance your access to other more desirable financial products aside from loans. The score is not just used to qualify for better terms on a loan but even affects the payment schedule, and collateral requirements among other issues. A score of 700 or above typically indicates that you are a reliable borrower who will be accorded relatively low interest rates and beneficial borrowing conditions. If your credit score is lower, it may be worth taking steps to improve it before seeking financing. This could involve paying down existing debts, correcting any errors on your credit report, or reducing credit utilization. Since creditworthiness scores also affect business relationships with suppliers and vendors, keeping your credit in good standing can provide broader benefits for your business operations and growth.
Frequently Asked Questions
What Is The Minimum Credit Score For A Commercial Loan?
Business loan with low creditworthiness scores may be difficult to avail. While the minimum creditworthiness scores requirement for a commercial loan can vary from one lender to the next, most lenders mandate a minimum creditworthiness score of 700. However, you can also find lenders that offer commercial loans against a minimum lending score of 650 and above. It is recommended to maintain a good credit history and creditworthiness scores to ensure that the loan application is approved seamlessly and the borrower is able to avail favorable terms and conditions.
What Is The Importance Of Creditworthiness Score For Msme Loans?
lending scores sum up the credit history of the individual and the business, offering a snapshot of their creditworthiness for the MSME loan. A high creditworthiness score alludes to the possibility of timely repayments, indicating a lower risk for the lender, boosting approval chances. A creditworthiness score implies a higher risk of payment default, leading to increased chances of outright loan rejection or limited credit sanctions against stringent terms. Minimum CIBIL score for msme loan requirement may vary from lender to lender. However, it is recommended that the applicant maintains a score of over 700 to ensure seamless loan approvals, in case of lower score, the applicant can always take measures to boost the score.
