A business enterprise and the individual representing it are two different bodies. Your personal actions should not affect your business’s well-being. However, both your personal credit score and business credit score are interdependent when it comes to credit health.
Therefore, when you apply for a small business loan, the lenders primarily rely on your personal credit score to determine your creditworthiness and give you the loan approval. Let’s find out how your business loan approval is based on your personal credit.
What is a Small Business Loan?
Small business loans are unsecured loans that you can avail of to finance your business growth and expansion. If you have been in the business for at least a few years, you can avail these loans to fund your business operations and get through the tough times. If you are looking forward to expanding your workplace or adding a new product or service line to your portfolio, a business loan can help you financially.
You can take a business loan for a variety of purposes, such as purchasing inventory, upgrading equipment, expanding the workplace, opening a new branch, investing in marketing, and hiring skilled employees. Whatever your purpose is, you can look forward to a business expansion loan to meet the related expenses.
Why is Credit Score So Important?
If you are applying for an unsecured business loan, your credit score is of utmost importance in many ways. It is the primary medium based on which the lenders get an idea of your creditworthiness and repayment habits. Ranging from 300 to 900, the higher your credit score, the better your chances for business loan approval will be.India has four credit bureaus that calculate your credit score based on factors like your repayment history, diversity in credit profile, credit length, credit utilisation ratio, debt-to-income ratio, and others.
Impact of Personal Credit Score on Your Business Loan Eligibility
A person or a group of individuals start a business and make it grow. Legally, the business owners and founders are different from the business entity itself. However, if your business is still in its first few years and you do not have any business credit, then the lenders will depend on your personal credit score to determine your creditworthiness. How regular you have been with your past payments can make a huge difference in your business expansion loan approval or rejection.
Also Read: 5 Reasons Why Indian Businesses May Face Rejection for Their Business Loan and How to Improve Your Chances
In some cases, if the lender cannot find sufficient information about your business profile, they may draw insight and make their decision based on your personal credit score. If you are related to a particular bank, they may pull your bank statements to make their decision. Therefore, your personal credit score carries due importance while applying for a small business loan. So, check your credit score and ensure that it is 700 or above before applying for a business loan.
Forms of Businesses for Which Personal Credit Score is Crucial
Depending on its structure, you may be the owner of a particular type of business. Your personal credit score is more crucial for certain forms of companies than others.
Let’s take a look.
Sole Proprietorship: As its name suggests, the entire business operations and reputation are related to the sole proprietor only. Therefore, there is almost no distinction between the business and its owner.
As a result, the owner’s personal credit score is synonymous with the business credit score, and it matters the most when applying for a business loan. Even legally, the sole proprietors themselves are responsible for the acts they perform as business owners.
Partnership Concerns: Partnership concerns are only extensions of sole proprietorships. It is highly likely that when you apply for a business loan for a partnership concern, the lenders will scrutinize your personal credit score before they approve your loan.
Private or a Public Limited Company: These companies have larger scale operations than sole proprietorships and partnerships. Although such businesses have their own credit score, your personal credit score also matters for business loan rejection or approval.
Your Personal Credit Score is Most Crucial for Unsecured Loans
The form of credit that you apply for also makes a difference in whether the lender will rely on your personal credit score or not. Since unsecured business loans are not backed up with security, collateral, or guarantor, lenders will check your credit score to determine your creditworthiness and assess the risk of lending to you. Whether you are applying for a short or long-term loan, your score will broadly impact your lender’s decision if it is unsecured.
Also Read: A – Z of Business Loans for First-Time Loan Applicants
The higher your credit score is, the more loan amount you can avail at lower interest rates. However, a low credit score may lead to lower loan amounts with higher interest rates. Still, lenders would not want to lend you if your credit score is lower than 700. If you are looking for a small business loan to fund your business growth or expansion, your score will be an indispensable part of your business loan application.
Get in touch with Clix Capital and meet your ends with a business loan of upto Rs. 50 lakhs. Take advantage of our easy application and fast approval process to get your needed funds within minutes.
However, since it is an unsecured loan, check your credit score and ensure that it is minimum 700 or above.
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