Your credit score is a simple number that shows how good you are at managing your money. It's like a report card that tells lenders if you're reliable with money. This score is really important because it can decide if you can get a business loan. 

A study by the Confederation of Indian Industry (CII) in 2022 found that 63% of small and medium-sized businesses (SMBs) have trouble getting loans on time and at a good rate because of low credit scores. 

So, if you are also looking to apply for a business loan and are wondering about the credit card you’d need, we have listed all the details below. 

What is the Required Credit Score for Business Loan Approval? 

There isn't a universal credit score for business loans, as requirements change according to the lender and type of loan. Some lenders offer loans even for people with bad credit, but the best loans often need a higher credit score. 

To see if you’re a reliable borrower, lenders usually check your personal credit score. If you possess a business credit score, they may look at that too. 

Personal Credit Score 

Checking personal credit scores is standard practice for most small business lenders. Here's what those numbers mean: 

  • Poor: 300-579 

  • Fair: 580-669 

  • Good: 670-739 

  • Very Good: 740-799 

  • Excellent: 800-850 

In order to qualify for most loans, you typically need a score of 600 or higher. But some lenders might lend to you with a score as low as 500. 

To improve your credit score, try paying your bills on time, having different types of credit, avoiding too many credit inquiries, and keeping your credit usage low. Late payments, high debt, and a short credit history can hurt your score. 

Business Credit Score 

A business credit score isn't always needed for a loan, but some lenders will check it. One common score is the FICO Small Business Scoring Service (SBSS) score, which ranges from 0 to 300. A higher score means better credit. 

A good SBSS score can improve your chances of getting a Small Business Administration loan. To secure a small SBA 7(a) loan, you might typically need a score of 155 or higher. 

Other companies like Dun & Bradstreet, Equifax, and Experian also provide business credit scores or reports. Lenders might use these scores too. 

Check your credit score for free here! 

Business Loans Without Collateral 

Collateral is something valuable that you promise to give a lender if you can't pay back a loan. It could be a house, a car, or other valuable things. 

While collateral can make it easier to get a loan, not all businesses have things to offer as collateral. 

That's where unsecured loans come in. These loans don't require collateral. Instead, lenders rely on your creditworthiness to decide if they'll lend you money. 

Lenders review your credit score and past financial behaviour to assess your repayment reliability. A very high credit score can help you get an unsecured loan, even if you don't have collateral. 

However, if your business does have valuable assets, you might want to consider a secured loan. Lower interest rates are common for secured loans because the lender’s risk is minimised. 

Why is a Good Credit Score Important? 

Lenders often look at your credit score to determine your trustworthiness. A strong credit score serves as proof of your dependable loan repayment habits. It tells lenders that you're likely to manage new debt well. 

A poor credit score, on the other hand, suggests that you might have missed payments or made other financial mistakes in the past. Lenders might worry that you'll do the same thing again. 

To avoid losing money, lenders focus on reducing risk. If you have a poor credit score, they might still lend to you, but they'll likely charge higher interest rates and fees to protect themselves. 

If your credit score is strong, lenders are more likely to provide you with the most competitive interest rates and terms. They are confident you're more likely to repay your loan as agreed. 

How is Your Credit Score Calculated? 

Here are the main factors that affect your credit score: 

1. Payment History: 

  • Credit bureaus track your payments on credit cards and loans. 

  • Even one missed payment can hurt your score by a lot. 

  • Your history of payments is the most vital element. 

2. Credit Utilisation Ratio: 

  • This points out how much of your credit limit is being consumed. 

  • It's calculated by dividing your total outstanding debt by your total credit limit. 

  • Keeping your credit utilisation low is good for your score. 

3. Credit Mix: 

  • This describes the various types of credit accounts in your name, such as loans and credit cards. 

  • Having a mix of different types of credit can help your score, but it's not the most important factor. 

4. Length of Credit History: 

  • This shows the length of time you've maintained smart credit habits. 

  • A well-maintained credit history can raise your score. 

5. Number of Hard Inquiries: 

  • A hard inquiry happens when a lender inspects your credit report, and excessive inquiries can have a bad impact on your score. 

6. Recent Credit Activity: 

  • Recently opening new credit accounts can temporarily lower your score. 

Factors Shaping the Credit Score Criteria for Obtaining Business Loans 

1. Type of Loan: 

  • Business loans of different types may have varying credit score expectations. 

  • As an example, a new business loan could require a higher credit score than a loan for an established company. 

2. Financial Institution's Policies: 

  • Each financial institution has its own credit risk tolerance and lending standards. 

  • Some lenders may be more lenient than others when it comes to credit score requirements. 

3. Economic Conditions: 

  • Economic conditions can also affect credit score requirements. 

  • During economic downturns, lenders may be more cautious and require higher credit scores. 

4. Loan Amount and Tenure: 

  • Larger loan amounts and longer repayment terms may require higher credit scores. 

  • Lenders may be more willing to take on risk for smaller loans with shorter terms. 

5. Co-signers or Guarantors: 

  • A co-signer or guarantor with a strong credit history can assist you in securing a loan, even if your credit score is less than ideal. 

  • The co-signer or guarantor agrees to be responsible for the loan if you default. 

Tips for Increasing and Improving Your Credit Score 

1. Pay Your Bills on Time: 

  • Always pay your EMIs (Equated Monthly Installments) and other bills on time. 

  • Timely payments show that you're a responsible borrower. 

2. Keep Your Credit Utilisation Low: 

  • Don't use too much of your available credit. 

  • A low credit utilisation ratio means you're not relying too heavily on credit. 

3. Limit Credit Inquiries: 

  • Too many credit inquiries can hurt your score, so only apply for credit when you really need it. 

4. Review Your Credit Report: 

  • Regularly monitor your credit report for any discrepancies or mistakes. 

  • Dispute any errors with the credit bureau. 

5. Maintain a Good Credit Mix: 

  • Maintaining various types of credit, such as credit cards and loans, can improve your credit score. 

6. Monitor Your Credit Score: 

  • Continuously monitor your CIBIL score to stay informed of any changes. 

7. Set Up Auto-Payments: 

  • Use auto-pay to avoid missing payments. 

8. Communicate with Creditors: 

  • If you're facing payment difficulties, speak with your creditors to explore solutions. 

  • There’s a possibility they can arrange a payment plan with you. 

Frequently Asked Questions 

1. Why does credit score matter for Business Loans? 

Your credit score plays a key role in lenders' decisions about granting a loan. A good credit score means you're a good borrower, and you're more likely to get a loan with better terms. 

2. Are business loans available to those with a low credit score? 

It's more challenging to access a business loan when your credit score is low. Lenders may be hesitant to lend to businesses with poor credit history. 

3. How much credit score is required for a business loan? 

You usually need a credit score of 700 or higher to get a business loan. A higher score means better chances of getting a loan with lower interest rates and faster approval. 

4. How is the minimum credit score determined for Business Loans? 

In most cases, a credit score of 750 or higher is considered excellent. Lenders often use this as a benchmark to decide if they should lend to a business. 

5. How can businesses with low credit scores still get a loan? 

If you have a low credit score, consider getting a secured loan using your assets as collateral or find a co-signer with good credit. You can also work on improving your credit score by paying bills on time and reducing debt.