In India, financial institutions rely on credit scores to assess the creditworthiness of individuals or businesses looking for loans. A good credit score improves the chances of loan approval and ensures favourable terms, such as lower interest rates and flexible repayment options.
However, knowing what qualifies as a good credit score for a business loan is important before you apply for it. If you are a business owner, this article is for you. Let us take you through what qualifies as a good credit score and the essential aspects you need to know about it.
Understanding the Best Business Loan Types According to Credit Scores
When it comes to applying for a business loan, it becomes imperative to understand the credit scores and which category you fall into. Credit scores may vary depending on the loan type you choose. There are two options in this regard:
- Term loans: When looking for term loans, you may come across varying credit score requirements. Some financial institutions offer loans with low credit scores compared to others. So, adequate research is important to understand these differences.
- Line of Credit: This particular loan type ensures flexibility for the business owner. In that case, there’s a possibility that you might not need a near-perfect credit score. However, understanding the loan provider’s requirements is always better before the application process.
Categories of Credit Scores for Business Loans
In this section, we will address the most important question, which is about the credit score categories for availing a business loan in India.
1. Excellent Credit Score
If your credit score is 750 or higher, loan providers typically view you as a low-risk applicant. This improves your chances of getting approved for a business loan and allows you to access better terms, like lower interest rates and more favourable repayment conditions.
2. High Credit Score
A credit score of 700 to 749 is generally considered strong and shows responsible financial behaviour. You might face slightly higher interest rates, but you're still in good standing with loan providers.
3. Medium Credit Score
A credit score between 550 and 649 is usually considered moderate. Getting approved with this score is possible, provided you follow all the other aspects laid down by the loan provider.
4. Poor Credit Score
A credit score below 550 can make your way to secure a business loan tougher. Lending institutions may view this score as risky, and you may need to take steps to improve your credit before applying. While it doesn’t mean you’re out of options, working on your credit could help improve your chances in the long run. You may need to apply for the loan along with a co-applicant or include a guarantor if you fall in this category of credit score.
In addition to your credit score, financial institutions also consider several other factors when evaluating your loan application. A good credit score may help you qualify for a business loan, but it’s not the ultimate parameter, as there are quite a few other aspects associated with it.
Is There a Minimum Credit Score for Securing a Business Loan?
It can’t be possibly said that there is a set minimum credit score for business loans in India. Financial institutions consider a variety of factors, including creditworthiness, when evaluating loan applications. While each loan provider may have different thresholds, generally, a credit score of 700 or above is viewed as a solid starting point for securing a business loan.
For those with lower credit scores, there are still options available. Low credit score business loans allow applicants to access funding despite less-than-ideal credit.
Ultimately, it is important to explore different loan products and understand that credit score requirements can vary between financial institutions. For instance, Shriram Finance offers a diverse range of business loan options tailored to individuals’ financial requirements and profile. Therefore, it is important to research thoroughly your options to get your hands on a business loan customised for your needs.
The Bottom Line
Understanding your credit score is an important step when seeking a business loan. While a higher credit score can improve your chances of securing favourable terms, options are available for those with lower scores. It's essential to regularly monitor your credit and explore different financial products to find the best fit for your needs. Over time, improving your credit score can lead to more opportunities and better loan terms.
