In India, small businesses, also known as MSMEs, play an important role in the economic growth. These businesses help create jobs and support local development. However, to grow smoothly, these business requires funds. Business loans can be a great way to get the funds they need. But to qualify for these loans, one should have a strong credit score. A credit score is a number which shows how trustworthy a business is when it comes to repaying loans. This article discusses the role and importance of a credit score in getting a business loan.
Understanding Credit Score
A credit score is a three-digit number that reflects your creditworthiness. It is calculated based on your credit history, including loan accounts, repayment patterns, and overall financial behaviour. Banks, credit card providers, and other financial institutions use this score to determine your ability to repay borrowed capital. A high credit score shows that you are a responsible borrower, while a low score may indicate a high risk for lenders. Your credit report includes details such as:
- Credit Accounts: Information about loans and credit cards, including their opening dates, limits, and balances.
- Payment History: Records of on-time and late payments on loans or credit cards.
- Credit Inquiries: Any checks made by lenders when reviewing your credit application.
- Public Records: Details of bankruptcies, loan defaults, or accounts in collections.
Why is Credit Score Important for Online Business Loans?
Online lenders often use your credit score as a key deciding factor when reviewing your business loan application. It helps them quickly assess how likely you are to repay the loan on time. Here’s how your credit score can affect different parts of the loan process:
1. Loan Approval
A higher credit score gives lenders more confidence that you will repay the loan on time. This improves your chances of getting your loan application approved. Most lenders look for a score of 700 or above, especially for unsecured loans that don’t require collateral. If your score is lower, you may face rejections or stricter conditions.
2. Interest Rates
Your credit score also affects the interest rate you are offered. If you have a good credit history, lenders see you as less risky, so they offer lower interest rates. This means you’ll pay less capital over time. On the other hand, a low score may lead to higher interest rates, making the loan more expensive.
3. Loan Amount
A solid credit score can also help you qualify for a larger loan amount. Lenders may feel more comfortable giving you more funds if your credit history shows responsible borrowing and timely repayments. This is especially useful if your business needs a large sum for expansion or working capital.
4. Faster Processing
Online lenders use technology to quickly process loan applications. A high credit score speeds things up because it signals low risk. With a good score, your application may be approved within hours, and the loan amount may be disbursed to your account in just a few days.
How to Improve Your Credit Score Before Applying
If the credit score is not at an acceptable level, several measures can be undertaken to improve it. Although enhancing a credit score requires time and consistent effort, it can significantly influence the outcome of a business loan application. The following steps may assist in strengthening the credit profile.
1. Pay Your EMIs and Credit Card Bills on Time
Timely repayment is one of the most important factors in your credit score. Always pay your loan EMIs and credit card bills by the due date. Even one missed or late payment can negatively impact your credit score. This is important when applying for online business loans, as lenders evaluate repayment patterns before approval.
2. Keep Credit Utilisation Low
Credit utilisation refers to how much of your total available credit you are using. For example, if your credit limit is ₹1,00,000 and you’re using ₹80,000, your utilisation is 80%, which is considered high. It’s better to keep this ratio below 30%. Lower usage shows that you can manage credit wisely, which positively affects your score.
3. Avoid Applying for Too Many Loans or Credit Cards
Each time you apply for a loan or credit card, lenders do a “hard inquiry” on your credit report. Too many of these inquiries in a short period can reduce your score, as it may indicate you are credit-hungry or facing financial trouble. Apply only when necessary.
4. Check Your Credit Report Regularly
Sometimes, your credit report may contain errors, such as incorrect loan amounts, wrong personal details, or repayments marked as delayed even when they weren’t. Checking your report regularly helps you identify and correct such mistakes early, which can protect or even improve your credit score.
Conclusion
A credit score is a critical factor in determining eligibility for business loans availed online. It assists lenders in evaluating the applicant’s repayment capacity and financial discipline. Ensuring timely repayments, maintaining low credit utilisation, and regularly reviewing credit reports can contribute to a strong credit profile. This, in turn, may facilitate smoother access to business financing.
