Credit Score for Working Capital Loan

A business requires a working capital loan to meet short-term cash needs in its day-to-day operations. A working capital loan is a sensible way to finance your business.

A working capital loan provides funding to fill the cash flow gaps that may happen due to seasonal dips in revenue. It can be a secured or unsecured loan. Businesses with favourable credit scores encounter less difficulty securing a working capital loan.

The requirements for minimum credit score for working capital loans in India vary for each lender. A credit score of 700 or above significantly increases eligibility for a working capital loan from most banks and a score of 685 is enough for Non-Banking Financial Institutions (NBFCs).

Banks and NBFCs ensure that the borrower can repay the principal amount and the incurring interest payments. They do so to avoid non-performing assets (NPAs) and bad loans in the future.

Banks are willing to extend loans to businesses based on their creditworthiness. Creditworthiness is the ability of the businesses to repay the loan. Banks rely heavily on credit scores to ascertain repayment of the given loan.

Your credit score predicts how likely you are to repay the loan. It depicts the overall credit history and financial stability.

If you are a business owner, always aim to maximise your business’ credit score because the credit score decides:

Most businesses in India do not have stable revenue throughout the year and may sometimes face a cash crunch. Working capital loans can act as a boon in such situations. Working capital loans provide a great opportunity for growth and revenue. The business owners can get immediate access to funds and settle the debt as soon as their sales align.

However, working capital loans can affect credit scores if the loan is tied to your credit. It means in case you miss payments on a loan instalment, your credit score gets negatively impacted. The choice of the type of working capital loan also affects credit ratings. Opting for a loan with higher interest rates may increase borrowing costs, adversely impacting your financial well-being.

Also, applications for multiple short-term loans may lead to multiple credit inquiries. Banks do not take multiple inquiries for credit reports in good light. Multiple credit inquiries may not be a good sign for your credit score as it signifies high credit risk.

Taking excessive debts just because you qualify for the loan amount is not a rational choice either. Getting burdened with repayments and faltering can cause significant harm to a credit score.

To make sure your credit score remains high with the working capital loan, try following these useful practices:

A credit score can be improved with a working capital loan. Working capital loans allow you to take advantage of growth and scaling opportunities at the right time.While your business’s daily operations run smoothly, it helps to manage finances and repay the loan on time.

This automatically improves the credit score of your business and the overall capability to finance the expenses with ease in the future.

Once you get a working capital loan, ensure that there is a business plan in hand. By doing so, you will be able to judiciously use the funds acquired to grow and develop the business and become profitable. When you have made arrangements for expenses, payments and cash flow, you have less chance of defaulting on the loan repayments. Also, don't opt for multiple business loans simultaneously. It negatively impacts your credit score.

Maintaining a high credit score with a working capital loan requires proper financial planning and optimum utilisation of acquired resources. When the business moves in the right direction, there will be enough liquidity at hand to manage the loan instalments.

Opt for a working capital loan that suits your requirements. When you don't default on payments and have a well-diversified credit portfolio, your credit score remains higher.

As a business, managing a healthy credit score increases your chances of getting a working capital loan sanctioned by banks and NBFCs. An ideal score for a business is considered to be 700 or above, NBFCs accept scores above 685. A credit score of 600 or less may lead to the rejection of the loan application. If the bank accepts the application, then you may have to pay higher interest rates.

The BizCredit Small Business Lending Index shows only 27.8% of the loan applications got approved from among the ones received in a month. The case with big banks and NBFCs is no different.

On the contrary, a business with stable history can get working capital loans at competitive interest rates and flexible payment terms.

The credit score for working capital loans depends on several factors concerning your business, its operations, credit history, and more.

The ideal credit score required for a working capital loan can be between 700 and 900 for banks. For NBFCs, any credit score above 685 is considered ideal. Any credit score lower than the ideal score is considered unfavourable. The loan application may face rejection if the low credit score isn't within the specified range.

Each business is unique in terms of its business goals, operations, and finances. However, here are 5 common ways to improve your business credit score:

Lenders give great significance to a business credit score for working capital loans in India. You can maintain a healthy credit score and payment history while managing the daily operations of your business to secure the chances of attaining short-term loans.

For a business in India, you can apply for a working capital loan to finance your immediate credit needs. However, a working capital loan must not be used to finance long-term growth or business plans