Expansion of the business, buying new machinery and tools, or just meeting daily expenses, applying for a business loan can fulfill these requirements which gives a much-needed boost to the business. However, one of the main decision-making factors lenders make when offering any loan includes your CIBIL score.
Lenders will check your CIBIL score because this indicates and showcases how the repayments of your past loans were and how well you manage your finances. Having a 700+ credit score is considered a good credit score score. So it is very important to maintain the CIBIL score positively all the time.
In this article, we will be discussing some of the reasons your score may drop and some steps to get you a business loan, even if the CIBIL score is at risk.
What are the reasons that your CIBIL score is dropping?
CIBIL score reflects how well you have managed to handle your past loans and credits you have taken. There could be a number of reasons why it goes low, and knowing how to improve it is very important.
Late Payments: If you have ever missed or made any late payments regarding your loans or credit cards, then this decreases your score. Payment history factors affect a lot into your credit score.
Multiple Loan Applications: If you are applying for a loan several times or unnecessarily, that might impact your credit score which shows to the lender that you have high loan obligations. The more the number of loans or credit cards applied for within a short period, the larger the signal of financial instability to the lenders, and thereby reduced scores.
Loan Defaults: In case the loan becomes a burden for you to clear on time then that will affect your credit score very badly, any non-payment of the loan amount, credit card amount, or settlement of loan with an amount lesser than the one owed results very badly in the credit score.
Error in Credit Report: Sometimes, the credit score might go down because of some errors in your credit report. The most common errors are personal details mismatches, wrong loan information, and mistaken entries of missed payments.
Let’s see how you can apply for a Business Loan if you have a low CIBIL score.
1. Research on Lenders:
A few financial institutions, in particular NBFCs and fintech lenders, do provide loans to people with very low CIBIL scores. These tend to take a less credit score-based approach and focus on such aspects as the performance of the business, cash flows, or sometimes even collateral. Research these lenders and apply with them for better prospects of getting your loan approved.
2. Apply for Secured Loans:
If your CIBIL score is poor, collateral will surely increase your chance of getting an msme loan. Collateral might be any form of valuable property, machinery, or business assets that the lender can own if there is a failure to repay them. Secured loans are less risky for the lenders, and hence, they are more likely to get your application approved.
3. Check Your Credit Report for Errors:
Sometimes, your low CIBIL score may be the result of your credit report having some errors. Go through your report carefully for any errors with regard to loans taken by you, or for defaults that are incorrect. Immediately file a dispute with CIBIL in case of errors to correct the mistakes. The improvement in your score may increase your chances of getting your loan sanctioned.
4. Good Business Financials:
Lenders will consider your business’s financial position, specifically if your CIBIL score is low. You must present a stronger case for your business by showing stability in income, cash flow, and growth potential. Ensure that your financial documents are accurate and well-kept, including balance sheets, profit and loss statements, and tax returns, which will help prove the repayment capability of your company.
5. Relationship with the Lender:
In case if you have a bank account with the same bank where you have taken a business loan earlier, or If you have taken a business loan from an NBFC earlier where you have taken the loan and paid back it on time without any defaults, make sure to maintain a good relationship with those lenders and reach out to them for the business loan. This might help you to make decisions that favor you as you were an old valued and faithful customer.
6. Apply for a Smaller Loan Amount:
Try to apply for a smaller business loan amount like 50,000 or even less, because a smaller amount of loan is easier to return, representing less risk to the lender. If your CIBIL score is low, there is a greater chance that the application for a smaller loan might get approved. Once you repay a smaller loan successfully, it will enhance your credit score to facilitate access to larger loans easily and build trust with the lender.
7. Government Schemes:
The Government of India has introduced a number of schemes to help SMEs. A few of those schemes extend loan facilities either with low credit score eligibility or interest rate subsidy. You may look at programs like the Pradhan Mantri Mudra Yojana (PMMY) or Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) if you have a low CIBIL score.
8. Use a Guarantor:
When applying for a business loan, try to have a guarantor with a high credit rating so that the lender can have confidence in you and give a loan to you with less risk for the lender. This is so because the guarantor has agreed to pay in case the borrower defaults. This is an immense responsibility on the guarantor hence choose one that trusts your ability to repay.
Conclusion:
While a poor CIBIL score will increase the issue of getting access to business loans, you can still find ways to access finance for your business with other available solutions such as applying to NBFCs, offering collateral for your loan, and availing any government scheme related to the loan. It is equally important to understand why the credit score is low and work in a direction toward improving the same over a certain period of time. Availing of a business loan is difficult with a low CIBIL score, but by following the above steps you will get help increase the chances of your application getting approval.
One of the best decisions that a borrower having a low CIBIL score can take is applying for a business loan through NBFCs. NBFCs are flexible unlike traditional banks, and their focus will be on the performance of the business and cash flow, rather than credit scores, hence making it easier for you to get funding for your business.
Disclaimer:
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