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Whether you are an individual looking for a personal loan or a business owner looking for a business loan, your CIBIL score is the first think banks, NBFCs or any other lender will check to assess your loan creditworthiness. As can be guessed, having a high CIBIL score value has several benefits. It not only streamlines and removes obstacles to borrowing, but also enables you to borrow at lower interest-rates and better repayment terms. We look at the importance of good credit score and high CIBIL score benefits, and what you can do to keep a healthy credit report.
In general, a minimum credit score of 650+ is considered a high CIBIL score value which makes you a reliable borrower. However, if you have a CIBIL score of 500 and below, there are practical ways to increase your CIBIL score. On that note, let’s understand the benefits of high CIBIL score for a borrower.
6 benefits of a high CIBIL score value
When you approach a lender for funds for your business, your business credit report will be vital. If your business is new or you do not have a credit report, it’s thee CIBIL score that matters. Let’s look at the advantages of strong CIBIL rating:
1. Avail business loans with longer tenure
One of the pros of a high credit score is the flexibility to go for long term loans. When you seek a loan, the bank negotiates whether or not to provide it for a short term or long term. As can be understood, long term loans provide you with the flexibility to have small amount repayments, which hardly puts a dent on your finances. Of course, you will have to repay the loan for a longer period, but if you pay your EMIs on time, it benefits your credit score as you emerge as a reliable and trustworthy borrower.
Now of course, the lender will check your reliability before offering long terms loans. This is where high CIBIL score benefits, i.e., the higher your CIBIL score the more trust lenders will have on your repaying abilities thus reducing their risks.
2. Get lower interest rates on business loans
Borrowing funds at a lower interest rate is among the main benefits of excellent CIBIL score. Whether you are taking a business loan in Chennai, Mumbai, Hyderabad or any other city, you already know that interest-rates vary depending on multiple factors. Your credit score being one.
Basically, when you approach a lender for a loan, they will evaluate your risk profile, i.e., what are the chances that you will default and not repay the loan. Having a high CIBIL score value means you have a low-risk profile, i.e., it is unlikely that you will default as your previous financial history gives little reason to believe otherwise.
As such, the value of a superior CIBIL rating will directly translate to you getting a lower business loan interest rate. For instance, if the bank offers business loans with an interest-rate between 12-18%, and your CIBIL score is 650, you can get a loan at 15% p.a. Similarly, if your CIBIL score is 850, you can even negotiate to avail the loan at 13% or 13.5% p.a.
Remember, since loans are borrowed for months, even the slightest difference in percentage-points can impact the overall interest paid.
3. Quicken the loan approval process
Good credit score perks also includes getting loans approved faster. Today, there are several types of loans you can avail for your business. In general, when availing online or offline business loans, the entire process can take between 3-15 working days. The higher your credit score the lesser the time it takes for loan approval. So, if you have a CIBIL score of 850, it’s likely that your loan application will be approved within 3-5 working days, whereas if your CIBIL score is around 600-650, the approval time can stretch to 8-10 days and will involve more paperwork.
Banks may also request collaterals to safeguard their interests and reduce the risks associated with lending you a higher loan amount. Moreover, higher credit score advantages also includes getting loan applications approved quickly especially during emergency fund requirement.
Remember, there are impact of loan rejection on CIBIL score as well. So, if you want your loans to be approved quickly and not get rejected, ensure you maintain the required CIBIL score.
4. Negotiate your loan offer better
It may sound surprising to you at first, but you can negotiate your loan offer with your lender. Lending and borrowing are the two faces of the same coin. Lenders (banks) want borrowers, and vice versa. The secret therefore is to realise how you can turn the tables to your advantage and negotiate your business loan offer.
The implications of a high credit rating means that you are a reliable borrower. You can negotiate your loan interest rates, payment terms, additional fees and charges, etc. Moreover, if you have a collateral, a business plan, and are debt free (or soon to be), you can use your high CIBIL score value to your advantage and negotiate the loan offer and loan repayment terms better.
5. Increase chances of getting pre-approved business loans
If you have ever got a call from a bank offering you a pre-approved business loan, then you will understand why a strong CIBIL score matters. A high CIBIL score benefits in that it builds the confidence in the lender that you have the means and credibility to repay a loan.
This means that the bank approaches you with a loan offer – it is on you to go ahead with it or not.
The important thing to remember about pre-approved loans is that banks offer it to selected customers only. They will check your annual financial statements, your debt to income ratio, your credit mix, relationship with the bank and several other factors that impact CIBIL score and make the offer.
In a nutshell, when it comes to borrowing, this is how a high credit score helps. You don’t have to approach multiple lenders or fill in long forms. The rewards of a high credit score is that the bank screens your profile and approaches you and you have a better chance of negotiating a favourable loan offer.
6. Get a higher limit on your borrowings
When you approach a bank for a business loan, they will assess your profile and quote a loan offer, i.e., the maximum amount they can offer you as loan. But, if you ask around, there will be others who have availed a higher or lower sum as loan from the same bank. How is it so?
One of the positive impacts of high creditworthiness, is that the bank has more trust on you as a borrower and can offer a higher limit on your loan. The more the loan amount, the greater are the risks.
For instance, a bank may offer up to ₹1 crore as unsecured business loan. As a business owner, you may have applied for a loan of ₹60 lakhs for business expansion. Now, based on your business credit score and report, the bank may offer you a loan less (e.g., ₹50 lakhs) or equal to the amount applied for. Having a high CIBIL score and its advantages are that the bank will have confidence in your profile and offer you a favourable sum to meet your business needs.
Benefits of maintaining high CIBIL value for SMEs
By now you understand CIBIL score’s positive effects and its importance in getting a business loan or even a credit card (personal and business). This is more so for small businesses that often need access to funds quickly and do not have collateral or any security to offer. In such cases, it is your business’s credibility, financials, revenue and potential that’s going to enable loan sanctioning.
High credit score and its benefits for a small business includes positive goodwill and credibility and how you are viewed in the banking circle based on your credit score. You should also ensure that you are not a defaulter in any instance and take steps to remove your name from CIBIL’s defaulter list.
In time, with the right steps in place, your business’s CIBIL score and financials will keep growing. You should focus on building good credit habits so that banks see you as a reliable borrower and are willing to provide you access to funds when you need it.