Business Loan for Low CIBIL/Credit Score

Running a business is not easy, and it won’t help if you can’t make payments and purchases on time to take advantage of the opportunities you find. This is why business loans have become an indispensable tool for modern entrepreneurs. Obtaining a business loan allows you to continue your business when there is a temporary shortage of cash.  The amount of the business loan you are eligible for depends on your expected earnings and the size of your business.

Before approving a business loan, the bank will check your credit history. Good long-term credit records are an important part of business loan approval. Missing credit card payments or defaulting on EMI loans may cause a low CIBIL  score, thereby reducing your chances of obtaining loans for your business. You must have a good credit score to prove your credibility. A credit score between 300-500 is considered average, and 300 is very poor. Due to the bad credit score, it is tough to obtain a credit line. 

But what is this business loan? First, we need to understand some of the basic concepts to proceed with this topic.

What is a Business Loan, and Why is it Necessary for a Business?

Businesses are organisations carrying out activities to gain profit. Therefore, it needs sufficient funds to finance start-up costs or covers expansion costs. Thus, the company obtains the necessary financial assistance through commercial loans. A business loan is a debt that a business is obligated to pay by following the terms and conditions of the loan. 

Business loans are borrowed capital that businesses use to pay for expenses they cannot afford independently. For example, some business owners use commercial loans to pay wages and salaries until their new company takes off, while others use borrowed funds for office supplies, inventory, or commercial projects. Lenders want to know how the business intends to use the borrowed money, so business owners should ensure that they clearly understand how to use the money. 

Now that you have understood what a business loan is and why it is needed, let us further look into the CIBIL score’s role in acquiring a business loan.

Will the Bank Check the CIBIL Score Before Granting the Loan?

Yes, the banks will examine your CIBIL Score whenever you ask for a loan to assess your credit record and financial standing. The better your credit score, the more likely your loan application will be accepted. Apart from CIBIL scores, the banks also look into the EMI to income ratio, employment status and payment history.

Why is CIBIL/Credit Score Needed for a Business Loan?

A company’s CIBIL score is the same as its financial profile. In other words, lenders must be informed of the applicant’s capacity to make regular payments and the guarantee that they will receive their money back when asking for any type of credit facility. This is accomplished by reviewing the credit history, which is represented in the CIBIL score.

Therefore the chances of loan approval are significantly higher if you have a greater credit score. Usually, credit scores higher than 750 are favoured by the lenders, and the approval process is initiated. On the other hand, a low CIBIL score provides a negative impression of the financial profile, and thus the loan may be rejected. It is always the best thought to check your CIBIL score regularly, and when you know that you have a bad credit score, you must try to improve it before you try to avail a loan. 

Now you know how a poor credit score affects your business loan approval, let us understand what factors lead to a low CIBIL score.

What Factors Lower Your CIBIL Score?

Let’s take a look at some of the major factors that can affect your CIBIL score negatively:

Irresponsible Payment Behaviour

Your payment history has the greatest impact on your score. It is important to provide monthly and borrowed credit card invoices. If you have several credit cards and loans, it is recommended to establish reminders and alerts to avoid missing or delay payments. The lost or delayed payment is insufficient for score and suggests that it does not coincide with the credit reimbursement. 

High Credit Utilisation Ratio

One of the golden rules to follow is to pay close attention to your credit utilization. It is a credit limit proportional to your available credit limit. High credit risk will send red flags to lenders because it indicates that you face a higher risk of default.

Outstanding Debt

You should always ensure that outstanding debts are paid off. When unpaid expenses are reflected in your credit report, it will affect your score. Even if the amount is small, it is recommended to cancel pending installments.

Pay only the Minimum Amount Due

The minimum part of the principal that is unspeakable every month is the lowest. If you always pay only the minimum amount, you can enter the debt trap. By paying only the minimum amount, rolling on the debt, leads to the collection of an interesting balance. 

Making Multiple Credit Applications

When you apply for a loan or a credit card, the lender will want to verify your creditworthiness and do this by extracting your credit report. This is called a difficult query. If you submit multiple requests, multiple credit inquiries are running at roughly the same time. These hard inquiries will be reported and will negatively impact your score. 

Errors in your CIBIL Report

Your CIBIL report details your current and past credit scores. If there are any errors in your report, it can affect your score. Therefore, if there is any discrepancy in your report, you must correct it immediately. 

Not Having a Credit Mix

It is important to maintain a healthy balance of unprotected loans. When you have a sound combination of different types of loans, it suggests that you have experience in handling both different types of loans. This is considered desirable by the lender.  

Length of the Credit History

If your credit history is long, it can help lenders make informed decisions when lending you credit. It’s best to focus on building credit early in life because you will have a good history of credit transactions when you apply for a home or car loan.

Closing old Credit Card Accounts

Credit cards are a good tool for establishing credit records. However, when you close your old account, you will eventually lose the long-term credit history associated with it. 

Therefore, If you have a higher credit score, your chances of getting a loan are much better. Lenders usually prefer credit scores of over 750, and the approval procedure begins. A low CIBIL score will make the approval of business loans complicated.

What are the Various Ways to Get a Business Loan With a Low CIBIL Score?

If you need a business loan urgently and a low CIBIL score is one of the obstacles, don’t get disappointed. This article will help you in this regard. Here you will know the various alternative methods to gain business loans even with a bad credit score. The other ways to opt for a business loan with a low CIBIL score are as follows:

Banks

Although banks are reluctant to provide commercial loans to people with low CIBIL score, they may be willing to do so under certain conditions. For example, some banks may agree to make loans at high-interest rates. In addition, if you have a fixed deposit in a bank, you may get a loan up to the amount of the deposit you hold in that bank. This is a secured way to avail of loans from banks.

Commercial Credit Card

Commercial credit cards can also be used to obtain credit lines. Credit eligibility may vary based on your previous payment history, etc. Although getting a business credit card may be easier than obtaining a loan, it is important to know that the interest rates associated with such cards are often very high as your bad credit score has been reflected in your credit reports. Thus the rate of interest will be higher than usual.

NBFC (Non-Banking Financial Company)

You can also contact non-bank financial institutions to help with your business loan requirements. NBFCs do not have a banking license, but they have the right to make loans. Although NBFCs can approve high-value loans, they also charge higher interest rates. Also, the credit rating requirements are not very strict when borrowing from NBFC. As a result, they provide a loan with high interest rates even when your report shows a low CIBIL score.

Income-Based Loans

In this option, the business prepays the full amount of funds and agrees to repay the loan based on a certain percentage of future monthly income. The repayment continues until the principal and interest are paid in full. 

Microloan

It is a small loan issued to small startup companies. Microloans are provided by non-profit organizations called microfinance institutions. The repayment period of this type of loan is usually up to 7 years, and its interest rate is more favorable than that of loans obtained through online lending institutions. This is provided even when you have bad credit scores.

Mortgage Loan

If a company owns valuable assets such as property, machinery, technology, etc., it can obtain a mortgage loan without your CIBIL score. In such cases, your low CIBIL score will not impact when you are obtaining a mortgage loan.

Overdraft Facility from Bank

Overdraft facilities allow clients to use or withdraw funds from their accounts until the approved limit is reached. Overdraft tools can help individuals and self-employed entrepreneurs solve short-term cash flow problems. Customers can use the overdraft feature through various platforms such as mobile apps, online banking, or visited bank branches. 

Convenient Features of Using an Overdraft are

Credit limit: the credit limit of each borrower varies from bank to bank. The limit is predetermined based on the relationship between the customer and the bank. 

Interest Rate

The interest rate on an overdraft loan is calculated based on the amount of overdraft used. This amount is calculated daily and settled at the end of the month. If the overdraft limit is not paid on time, the penalty is added to the principal.  

Prepaid Fees

There are no prepaid fees for using the overdraft feature.

Refunds

Credits obtained through overdrafts are not paid by EMI. Customers can cumulatively repay overdraft loans.

Just because you have other ways to acquire a loan, it is not a good idea to keep low CIBIL scores. When you know that you have a bad credit score, it is always better to try and improve the CIBIL score for future benefits. Let us now see how we can increase our CIBIL score quickly.

What are the Steps to Improve Low CIBIL Score?

If you need a business loan urgently, it may not be easy to increase your CIBIL score immediately. Here are some ways to improve your low CIBIL score and have a better chance of getting your business loan approved. Following these simple tips will help you get rid of your bad credit score from your credit report. 

Have a Good Credit Balance

There are two types of secured and unsecured credit. To increase your CIBIL score, it is important to strike a good balance between these two types of loans. Secured loans are loans issued by financial institutions in which the assets are used as collateral or collateral for the loan. 

Keep Credit Utilization Low

Credit utilization is the ratio between the total credit used by customers on their card and the total amount of credit available on the card. Clients must keep credit utilization low. 

Pay All Bills on Time

Paying bills on time is very important because your refund is 35% of your credit history. Avoid delays in payment, as this will have a negative impact on your credit score. Ensure that credit card and other EMI bills are paid on time. 

Plan Strategically

You need to plan to clean up your credit card balance and improve your credit score before the expiration date. Refuse to become a joint account holder to avoid becoming a joint account holder or guarantor of a loan because any default by the other party will also be reflected in your CIBIL score.

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