The lending industry has undergone a drastic change over the last half a decade. Loans are moving towards a digitalized platform which has led to a faster, more efficient processing system that benefits both lenders and borrowers. Especially when it comes to business loans, technology has aided banks and financial institutions in approving applications instantly.
Business loans are a form of secured loans that are taken for the purpose of setting up a venture. However, an extensive background check is required to be performed by banks before sanctioning a business loan. This is where the borrower’s CIBIL score plays a major role. Most business loan applications get rejected because the borrower has a low CIBIL score.
Understanding Your CIBIL Score
The Credit Information Bureau (India) Limited was formed in the year 2000. This government establishment regulated the ‘CIBIL score‘, which is a numeric summary that determines a borrower’s worthiness to borrow money. Since then, this score has become the primary parameter that every bank and financial institution uses as a basis to accept or reject a loan application.
Nowadays, it is easy for any individual to check his free CIBIL score online. This will help a borrower understand the chances of getting a business loan approved. If your score is below 750 on a score range of 300 to 900, then there is a high probability that your loan request will not get approved.
Banks today look for a credit score of at least 750 as that will give them confidence in your repayment capabilities as well as your default infrequency. According to a recent CIBIL survey conducted during 2017, it was found that 74% of Indian consumers check their CIBIL scores at least twice a year, either to improve it or to apply for new credit.
Your CIBIL report is generated based on numerous factors, all of which determine your credit history.
- The first is the credit you have availed so far as well as the consistency of timely repayments on the credit. This calculation includes any liability you may have incurred to dates such as credit lines, credit cards, personal loans, house loans, car loans, and business loans.
- The second is your credit utilization. This determines how much of your credit limit you have exhausted in the past, be it on your credit cards or overdraft accounts.
- The third is your series of defaults. This is the most important factor considered before accepting a loan application. Every missed payment, overdue installment and bounced cheque gets calculated in arriving at your credit score.
- Lastly, the ratio of your secured liabilities to your unsecured liabilities. This will help banks and financial institutions understand the pattern and reliability of your past credits.
Improving Your CIBIL Score
Per a recent survey, it was found that over 62% of Indians were unaware that banks and financial institutions check CIBIL scores to settle loan terms and perform a background check. This lack of awareness leads to people having a bad credit history.
However, there are many ways to improve your existing CIBIL score. But, if you already have a bad score, then it could take anywhere from six months to one year to better it.
Overdue payments reflect poorly on your credit report. The best way to improve your credit score is to make timely repayments for all the credit you have borrowed so far.
A good way to do this is to complete the monthly payments before the due dates. These days, every financial institution sends active reminders well in advance of the due date in the form of e-statements and messages.
Low Credit Utilization
Credit lines and credit cards are two widely used forms of short-term credit that provide you with a utilization limit based on your financial capacity. This limit can be utilized in parts or as a whole and is then repaid at a later point in time.
The best practice is to consistently use less than 40% to 50% of the available credit every time funds are required. Further, you can also boost your score by paying off the outstanding amount within the same billing cycle instead of paying just the minimum amount.
Reduction of Unsecured Loans
The larger the credit risk, the lower the CIBIL score. Excessive unsecured loans such as personal loans don’t paint a pretty picture on your credit report. This shows your dependency on forms of credit that are sanctioned without collateral, further increasing the financial institution’s uncertainty about default. It is best to reduce the number of unsecured loans in your portfolio as they present an element of risk to lenders.
Minimum Credit Portfolio
Availing multiple loans or handling many credit cards at a time can deter lenders from providing you with a business loan. This is because having a large and unnecessary credit portfolio raises queries regarding your ability to handle your existing expenses with your current income. Further, banks will analyze the amount of debt already incurred against the business or against your sources of reported income.
Avoid Unnecessary Closures
One of the best ways to manage credit is to have a limited number of long-standing borrowings with optimum credit utilization. This shows your healthy credit relationships with banks and financial institutions, thereby providing additional comfort about your responsible financial management.
Maintaining a High Credit Score
India’s financial system depends heavily on CIBIL scores. Nowadays, there are credit management and improvement services that match lenders to borrowers depending on credit history. One method to understand whether your business loan application is likely to get accepted or rejected is to generate your CIBIL report online before going to a financial institution.
With appropriate financial planning and an organized repayment schedule, getting your business loan sanctioned will not be difficult. But having a good credit score at the time of applying for a loan isn’t sufficient. The only solution is to maintain this score throughout your life with a balanced credit portfolio. Ultimately, it is easier to consistently manage your credit score than to recover it once it is distressed.