By 
A credit score is between 300 and 900 allotted to a borrower based on the borrowing and repayment history. Lenders resort to credit rating companies to evaluate the score of a business entity or individual before lending.
Your credit score impacts your loan eligibility and the terms of the loan sanctioned. Let’s see how.
Loan eligibility
A good credit score assures the lenders of the creditworthiness of the borrower. Lenders are readily willing to lend to an individual having a score above 700. On the other hand, when your credit score is deficient, the lenders may not be willing to take the risk of providing you with a business loan.
If you are a borrower with an average credit score, you may still be eligible for the loan. However, you may not have a say in deciding the loan terms.
Amount sanctioned
Besides loan eligibility, your score also impacts the loan sanctioned by the lender. For instance, if you have an average score of 500 – 600, the lender may provide a loan for a partial amount only and not the entire application. This means that you would have to arrange for the balance funds from your private sources or friends and relatives.
If your credit score is good, the lender may sanction the entire amount of the loan application.
Interest rates
All lenders generally have pre-determined business loan interest rates depending on the tenure of the loan. They may, however, charge a premium or grant a discount depending on your score.
Let’s say Rahul is doing well in business. He usually borrows from the same lender and has never defaulted in repayment. He has a good credit score. Based on experience and good relations with the lender, the lender may offer him a discount on the interest rate on his new borrowings. In future, if Rahul’s score deteriorates, the lender may stop giving a discount on interest on business loans. On the contrary, the lender may also charge a small premium if the score keeps on falling.
In simple words, your credit score impacts the interest on your business loan. A good score can help you procure a loan at market rates, whereas a low score would compel you to accept a loan at high-interest rates.
Collateral/Guarantee offered
Banks and financial institutions generally demand collateral or security for approving a personal loan. The security may be in the form of assets, shares, securities, fixed deposits, post office deposits or jewellery.
The lender may demand high-value collateral from a low or average credit score. In some cases, the lender may also require a personal guarantee and collateral.
The reputation of the lender
It is essential to deal with a reputed lender whenever you take a loan. This ensures that the loan interest is calculated correctly, your collateral documents are kept safely, and all documentation is proper.
When your credit score is good, all lenders will approach you. You can then choose the lender with a good market reputation and which offers you the best possible loan terms.
If your credit score is extremely low, you would have to scout for lenders willing to lend. Many good lenders may not sanction your loan. In that case, you may be compelled to procure a loan from a newly-established lender or a lender with average market standing.
Conclusion
Procuring a small business loan is very important for the smooth running of your business. Before approaching the lenders, you can check your credit score online. This gives you an idea of what to expect from the lenders. If there is no financial urgency, you can improve your credit score before approaching the lenders.
Some credit rating agencies charge you for providing your credit score. Others offer a free credit score check.
Comments