What CIBIL Score Should I Have To Get A Business Loan?

When one hears someone talking about CIBIL, one tends to believe that it must be related to an individual who is seeking loans such as personal loans, home loans etc. What is not known to everyone is, that CIBIL is the keeper of records for all credit facilities availed by individuals and business entities. Individuals are scored according to their credit performance, whereas businesses are not given any score but their detailed credit reports speak for themselves. Private & Public Sector Banks, Non Banking Financial Institutions, Housing Finance Companies, and other financial institutions, that actively lend to businesses, use Company Credit Reports to estimate the company’s ability to repay the loan sought before they extend any credit facility to a company.

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Unlike individual scores there are no benchmark CIBIL score that you must possess to get a business loan however, there are details in your credit report that could dampen your plans of seeking credit or accentuate your creaky credit situation. You must watch out for them and work to make sure these don’t make way into your report.

 

Understanding the Company Credit Report

 

A company credit report is a factual account of your previous debt repayments, the credit lines availed, lenders who have extended credit and lenders who have enquired into your report in the past. This report helps a prospective lender analyse the creditworthiness of a borrowing firm, which basically means lenders try to judge the likelihood of default by the borrowing entity. The lender is interested in looking for number of “wilful defaults”, suits filed against the company, outstanding loans, existing exposure to credit including those that the borrowing entity has guaranteed etc.

 

Some Commonly Reported – Trade Lines

A business may need several types of loans during its functioning, such as:

  1. Term Loans: Loans that are extended for a specified period and a specific purpose. They can be short term, medium term or long term.
  2. Bank O/D: An overdrawn current account, short term funding.
  3. Letter of Credit: A letter that guarantees to a seller, on account of buyer, that the payment for goods or services will be paid
  4. Bank Guarantee: A sort of insurance against damage or loss of goods or service and to make good the payment.
  5. Lease Finance: Where the bank becomes the legal owner of a particular asset of the borrowing firm and remains so unless the final instalment of the loan is not repaid. In other words, the asset is given as collateral.

And many more.

How to Clear CIBIL Issues

Some of the common stumbling blocks in a report are:

Problem #1: Loans that are “written off” or “settled” by a lender, means loans that went unpaid by the borrower or the lender was unable to extract money from the borrower and were eventually “written it off” in the books of the lender. It quashes a borrowing entity’s aspirations & it may almost never be able to get a loan. A lender may never come around it. Although the report shows information of past 24 months only, but such accounts may remain on your report for a much longer time like seven or ten years.

Solution: Ideally avoiding them could be your best bet. But sometimes, not out of choice but due to financial constraints you were unable to pay off your loans in the past. The only way to have it removed from your report is to pay to the bank now and request the lender to send a clean report to CIBIL for updating.

Problem #2: You have been paying your dues, however in a delayed fashion.

Solution: Change your attitude towards your creditors. This alters the way a lender perceives you. Either the business is not able to generate enough returns to meet the financial obligations on time or the borrowing entity has half a heart to pay back the loan. Either ways, the lender will consider the entity to be very risky. Even if a lender does grant a credit to the firm, it will do so at higher rates of interest.

Problem #3: You seem to be overleveraged already. The amount of debt are already exposed to plays a vital role in estimation of the borrowing firm’s credibility.

Solution: If you are already burdened under a surmounting pile of debt, lenders will be strictly wary of extending further loans. This is because they begin to question your ability to keep up with future repayments. You must first pay down existing debt and then apply for more loans. If you are hard pressed for funds then you could try peer-to-peer or business-to-business loans for the period.

Problem #4: Important financial ratios reflect a poor financial health of the firm.

Solution: Inventory, turnover, receivables turnover, liquidity, leverage, gross profit margin ad return on sales are some of the key financial ratios that credit grantors consider before extending any credit facility to you. These ratios help a lender take a look into the company’s financial health and only if they feel the company is strong financially, they sanction the loan.

Problem #5: The loan to which the firm stood as guarantor has been defaulted.

Solution: As with other things, this again throws a poor light on your credibility. A guarantor has committed to make good a default by the borrowing entity. In the absence of so, the guarantor is as good as the defaulter itself. Although it may not have a direct bearing on your own application but your CIBIL report will carry a remark too. A lender may consider you as someone who does not honour commitments and your image as a borrower will be tarred.

There are certain items or details in your report like incorrect name or address of the firm, repetitive account information, wrong relationship status of the signatory etc. and you would like to have them corrected then raise a CIBIL dispute. You must fill the dispute resolution form online to highlight your concern with the bureau. However, you cannot have any intended defaults or late payments removed from the account.

A clean and healthy credit report enables a borrowing entity to capture favourable terms and gives an upper hand to negotiate lower rates of interest. Thus it is in your own interest to be a responsible credit user and make sure your report shows a credit friendly firm.

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