Introduction
Most business expansion requires finance that is not readily available. Financing a business through loans is the common way of filling the gap. However, many business people face a major obstacle like having low credit scores. The lender often bases his assessment on credit scores to evaluate the creditworthiness of the borrower. Low credit score may degrade your small business loan eligibility, but you can still get your business loan with some increased effort and preparation.
At What Point Is a Credit Score Considered Bad?
There is a three-digit number which reflects your creditworthiness, that of a credit score. The higher the score, the better your credit history appears to lenders.
750 and above: Very Good credit score
700-749: Good credit score
650-699: Fair credit score
600-649: Poor credit score
Below 600: Bad credit score
A credit score below 650 may label you as a high-risk borrower to banks and NBFCs.
Now let us discuss the options of Accessing a Business Loan to grow your MSME, even if it’s at a Low Credit Score.
- Research on Lenders: A few financial institutions, especially NBFCs and fintech lenders, do lend money to people with very low CIBIL scores. These tend to not take the credit score-based approach as seriously, and instead, focus on such aspects as business performance, cash flows, or sometimes even collateral. Research these lenders and apply to them for better prospects to get your loan approved.
- Apply for Secured Loans: If your CIBIL score is poor, collateral is sure to enhance your chances of acquiring an MSME loan. Under this type of loan, collateral can be anything worth like machinery, or business assets that the lender can seize in case of a failure to pay back. Secured loans are less risky for the lenders, and therefore, they will go through with approving your application.
- Check Your Credit Report for 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 (https://www.cibil.com/) in case of errors to correct the mistakes. The improvement in your score may increase your chances of getting your loan sanctioned.
- 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. Other financial documents, such as balance sheets, profit and loss statements, and even tax returns, must be kept accurate to help prove the repayment capability of your company.
- Relationship with the Lender: If you’ve previously taken and repaid a collateral free business loan on time with a bank or NBFC, make sure to maintain good relationships with those lenders and take the help of that lender to meet the business loan requirements. This may keep you at an advantage, as you were an old valued and faithful customer.
- Apply for a Smaller Loan Amount: Apply for a loan amount that is smaller, like ₹50,000 and below in which repayment is easier and less risk involved for the lender. Lower chances of disapproval occur with a lower credit score. The lender gains confidence in the borrower, and the ability to repay increases your chance of getting larger loans for the future.
- Government Schemes: The Government of India has launched many schemes to support SMEs. A few of those schemes offer loan facilities either with low credit score eligibility or interest rate subsidy.
- PMEGP (Prime Minister’s Employment Generation Programme)
- MUDRA Loans (Micro Units Development and Refinance Agency)
- Stand-Up India Scheme
These schemes have lesser interest rates and flexible requirements.
- A Guarantor: When applying for a business loan, it is advisable to have a guarantor with an excellent credit rating so that the lender is able to trust you and give the money to you with less risk to the lender. This is so because the guarantor has agreed to pay if the borrower defaults. This is a great responsibility on the part of the guarantor hence choose a reliable one that trusts your ability to repay.
Conclusion
A poor CIBIL score will increase the issue of not getting access to business loans, but it doesn’t mean that you cannot access finance for your business anymore. You can still try to find ways and avail some other solutions such as applying to NBFCs, offering collateral for your loan, and availing any government scheme related to the loan. The second is, equally important to know why the credit score is low and work in a direction toward improving the same over a period of time.
Compared to traditional banks, NBFCs as they cater to small businesses, and even those who have unconventional financial backgrounds. NBFCs, therefore, present a faster process, loan options especially made by their flexibility. For those business persons who face issues related to credit score, a partnership with NBFCs is likely to be a perfect one for bringing progress into their MSMEs.
Photo by Mikhail Nilov:
