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We all the importance of a CIBIL score while obtaining a business loan. CIBIL score is a critical factor that impacts loan applications. However, do you know that loan rejection impacts CIBIL score adversely?
This article explains what impact loan rejection has on your CIBIL score and how to minimise the impact. Let’s begin with if loan rejection has an impact on CIBIL score.
Does loan rejection have an impact on CIBIL score?
The answer to this question is yes. Loan rejection affects your credit score adversely.
Loan rejection is just not the denial of credit to you or your business, but it impacts your credit score too. If you are surprised, let’s understand how it impacts your CIBIL score.
If you think the CIBIL score is only a numeric number that influences your borrowing eligibility, you are wrong. Instead, the CIBIL score report also includes a few comments and remarks. Your credit history including loan rejection is recorded here. When a lender rejects your loan application, the next lender tends to be more vigilant and scrutinise your application more carefully. This is how it works:
Negative information
As mentioned above, if your loan application is rejected, the information along with its reason will be recorded in your CIBIL score report. This gives a fair idea to the next lender about why your loan was rejected. In other words, the lender considered you as a high risk borrower, and hence your loan was rejected. High credit risk means lower creditworthiness, which affects your credit score.
Hard enquiry
When you apply for a loan, the lenders analyse your creditworthiness through various mechanisms. While loan underwriters scrutinise your financial documents, the bank also performs a credit check to assess your creditworthiness. This is called a hard enquiry. On the flip side, each hard enquiry is recorded in your CIBIL score. Multiple hard enquiries in a short period mean that you are actively seeking credit and it may make you seen as a high-risk borrower.
Credit utilisation ratio
Credit utilisation means the total credit available for your business compared to the credit you are using. Higher credit utilisation impacts this ratio negatively and ultimately has an adverse impact on the CIBIL score too.
Credit history
Credit history is one of the important aspects considered while calculating credit score or CIBIL score. If you have a history of multiple loan rejections, it is considered as financial instability. It further impacts the credit score. Moreover, poor credit history can be other reason for a loan rejection.
How to improve credit score after loan rejection?
- In case you face a loan rejection, check your credit score after a few days. Analyse what impact is has on your credit score, which needs to be repaired. The minimum credit score for getting a business loan is 700 or more.
How to check your CIBIL score?
Checking your CIBIL score is easy. You can visit Tata nexarc’s Business Loans page and click on ‘Check your CIBIL score’. Fill in your details and get the CIBIL score. It is free a way of checking your CIBIL score. You will also get exclusive loan offers. You can also check your credit score on CIBIL’s website, however, you will need to pay the fees to get your credit report.
- A business loan can be rejected due to multiple reasons such as falling short of business vintage, falling short of documents, or not meeting any other eligibility criteria. Therefore, it is important to identify the reason and then work towards eliminating it.
- If your preferred bank has rejected your business loan, you can apply for a loan in an alternate lending institute such as an NBFC. Normally, NBFCs are known for having an easy application process and relaxed eligibility criteria. The chances of your loan getting approved are higher. This will not only enable you to get credit but also will help you to improve your credit score with regular loan repayments.
- Increasing the credit limit of your credit card will help you to improve your credit utilisation ratio. This is also one of the ways to improve your credit score.
- Avoid being a guarantor to an irresponsible borrower. In case you stood guarantor to a defaulted loan borrower, it will affect your CIBIL score/credit score negatively.
Tips to avoid loan rejection affecting your credit score
- Check your credit score regularly and take the necessary steps to improve your credit score.
- Learn about business loan eligibility criteria before applying. Understand the minimum credit score required for a business loan.
- If your credit score is lower than the required, do not apply for a business loan in the respective bank. There are higher chances of a loan being rejected and further affecting your credit score.
- Avoid making multiple loan applications in a short span. Many times, business owners apply for business loans in multiple banks/NBFCs to get quick approval. However, it is wise to learn the eligibility criteria of each financial institute. This will help you to understand the higher probabilities of loan approval and apply selectively. Such a selective method of loan applications will reduce the chances of loan rejections and will not hamper your CIBIL score.
- Make sure you have a healthy credit history. Make regular payments of bills, taxes, etc. This helps to build credit scores.
Final thoughts
Business loan approval and credit score are interlinked in many ways. While loan rejection impacts CIBIL score and vice versa. Therefore, having a good credit score and a healthy credit history is important.
Swati is a passionate content writer with more than 10 years of experience crafting content for the business and manufacturing sectors, and helping MSMEs (Micro, Small and Medium Enterprises) navigate complexities in steel procurement, and business services. Her clear and informative writing empowers MSMEs to make informed decisions and thrive in the competitive landscape.
