Availing a small business loan is a common scenario in today’s world. It doesn’t mean your company is struggling. Small business loans are used as a much-needed boost to your working capital sometimes. It helps thrust through potential risks and bridle over hurdles in the management of cash flow.
Whenever you avail for a business loan, it is advisable to repay the loan at the earliest with any backlogs. Defaulting on a business loan can affect your credit score. That is why we always keep watch over our Cibil Score.
What is a Cibil score?
Cibil is one of the top credit rating agencies in India. A Cibil score is a standard gold method to evaluate if a borrower can be trusted to pay back the credit availed by him/her. It is a range of 3 digit numbers ranging from 300 to 900, which is used to measure credit-worthiness. This is estimated by the credit rating agency based on past and ongoing records of credit history. It is used by banks and credit card companies to evaluate the potential risk of lending loans to each individual based on their score.
What is the reasonably good credit score for a loan?
A good Cibil score falls in the range of 700 to 900. This puts you in the safe zone, and you will not most likely face any issues in applying for small business loans. Scores below this range will make it difficult for you to avail loans and make banks reconsider if you can be a trusted recipient.
Having a Cibil score above 900 is rare but excellent to make you truly creditworthy. This shall entitle you many privileges like higher loan amount, reduced interest rates, quick approval of loans, and the extended repayment period. It is not uncommon to falter in paying your dues when you are stuck in a busy work schedule or are running short of funds. In fact, there are ways to improve credit score.
Factors that decide your credit score
Few factors are taken into consideration while deciding your credit score. They are as includes a track record of past payments. You need to be consistent with your payments. Failure in doing so makes you liable to additional charges and negatively impacts your Cibil score. It also assesses previous settlements, write-offs, and defaults on loans taken. Lower loan balance indicates healthy credit use and, in turn, higher credit scores. Loan equities point out to excessive credit use pattern. This brings down the credit score.
How to amplify your credit score?
It can take a minimum of 4 months to a year to improve the credit score. But it is definitely worth the effort regardless of the time taken. Here are a few ways to improve your Cibil score and make you credit-worthy.
Improve your Cibil score
Regular repay your dues
+ Cibil score
Credit within your limit
+ Cibil score
Multiple lenders for a loan
Joint accounts in your business
More Secured loans
+ Cibil score
More Unsecured loans
– Cibil score
- Regularly repay your dues.
Repaying your loans on time indicates you are systematic and trust-worthy. It is not desirable when you have a tough time paying your credit bills on time and eventually have a pile of pending bills to clear. Not only does it make it hard, but you are also going to get stressed over it and will struggle to find other alternatives to subdue the problem. This will, in turn, affect your credit score and affect your chances of getting small business loans.
EMIs you have chosen can also cause a lot of hassle over time, as it is an outstanding payment that weighs doing your financial resources with additional penalty charges adding up over time. This will adversely affect your credit score. Ensure that these are taken care of in time and choose more extended repayment periods so you can clear it eventually.
- Credit within your limit
It is a smart move to opt for credit within your financial limit. By availing for a credit scheme with an upper range that you can take care of, you are ensuring that you have minimal chances of defaulting on the loan and expose you to compromised Cibil scores. This might seem hard because there are lots of expenses to cover up in business, but knowing your limit can save you from unwanted expenditures and hassles that arise over the years.
- Monitor the use of credit
When you keep track of your bills, you will have better insight and be more vigilant while using it the next time. It will help you rethink whether you are spending your capital on something that you want or if it is something you absolutely need. Remember, “Lesser credit use, lesser debts.”
- Avoid multiple lenders for a loan.
It is also common to take up new loans to cover up previous loan bills you can’t clear off. This can cause an endless loop of multiple loans over another, and you will cause you so much trouble. So use them judiciously. It can help you dodge duds that are not worth your investment and keep your Cibil score in check.
- Using joint accounts in your business
Joint accounts need the cooperation of both the account holders to keep Cibil scores stable. If any one account holder is individually liable for any pending dues or charges, which can affect your credit history too, therefore, it is essential that you manage this together with your partner effectively or procure a single account for the business alone.
- A combination of secured and unsecured loans
Secured loans imply that you are providing security to your lender that it will be repaid. But unsecured loans don’t provide a guarantee to the lender because they do not have any asset to recover in case you falter. Therefore, too many unsecured loans can push down your credit score drastically. To avoid this, you can maintain a blend of secured mortgage or business loans with unsecured loans like your personal loans or credit card.
It is important you have proper discernment of your financial limits and make the right decision while choosing your business loans. Ramp up your Cibil score and prove that you are creditworthy.