What is the minimum credit score required for a business loan?

While applying for any business loan, one of the key requirements is a good credit score. Along with other documents, banks and NBFCs check for the applicant’s credit score before approving the loan. Therefore, one question that every loan seeker asks is:

‘What does my credit score need to be to get a business loan?’

This article talks about minimum CIBIL score required for a business loan, difference between business credit score and personal credit score and how to improve your credit score.

What is a good credit score for small business loan?

There is no fixed answer to this. It depends on various factors including what kind of a loan you are seeking, involvement of collateral, loan amount and so on.

Many a times, importance of credit score is lesser in case of collateral loan, as you pledge an asset. The lender can liquidate the same in case you do not make timely payments. As a result, CIBIL score of 600 is also good.

On the other hand, collateral free loans require higher CIBIL score. In case of collateral-free loan, a score of 700 and above is considered as a good score.

Loan type	Recommended credit score
Business loans with collaterals	600+
Business loans without collaterals	700+

Note: Eligibility and credit score requirement changes depending on the lender. Therefore, it is recommended to check the minimum required credit score for small business loan with the respective lender.

Business credit score vs personal credit score

Before you attempt to check your credit score, you should know that a credit score of an individual and of a business are two separate aspects. Here is the difference between personal and business credit score.

Personal credit score	Business credit score
It indicates an individual’s creditworthiness	It indicates a business’ creditworthiness
It is required for seeking a loan for individual’s needs such as personal loan, home loan, car loan, etc.	It is required for business loan requirements such as loan for a commercial property, loan for a commercial vehicle, etc.
In order to arrive at personal credit score, individual’s loan payment history, credit card usage, credit capacity, etc., is considered	It is derived through business’ loan payment history, other financial commitments, etc.

Note: For start-ups and new business owners looking for bank financing, the borrower’s personal credit score and history is also considered. As such, if you are seeking a start-up loan for new businesses, ensure to maintain a credit score of 750+ to increase your chances of getting funds for your business.

It is advised that one should keep personal and business finances separate. In case you have not done it, personal transactions will affect credit score of the business and vice versa.

What can you do if your business’ credit score is low?

In case your credit score is at lower side, and you require loan for your business needs, here is what you can do:

• Check eligibility with your bank or NBFC. You can verify on the loan amount that can be approved by the lender. Determine if the approved loan amount is sufficient for your business needs.
• Explore various government loan schemes rolled out for MSMEs. Considering the common issues faced by MSMEs, the government has launched loan schemes at subsidized interest rate.
• Find collateral for your loan. As mentioned earlier, eligibility criterion of credit score is lesser, in case of a loan with collateral. You need to be careful while pledging an asset as collateral. In order to keep your personal and financial transactions separate, you can choose to pledge a business asset such as commercial property, machinery, vehicle, etc., over personal property.

How to improve your business’ credit score?

It is important to for an MSME to keep a track of the credit score and improve it if needed. It is not only related to loans, but it identifies your creditworthiness that impacts your suppliers and ultimately your reputation too. Here are some simple ways to improve your business’ credit score.

• Check your credit score regularly, so that you can make a timely improvement if needed.
• Pay bills and taxes on time. Make a repayment of credit card bills, loan EMIs, etc. on time.
• Keep an eye on your cash flow. Avoid negative cashflows.
• Avoid having many credit accounts and high credit utilization.

Closing remarks

Although there is no fixed credit score that can be termed as a good credit score for a business loan, it is best for businesses to maintain higher score. The loan eligibility for MSMEs and small businesses are considerably relaxed making it possible for businesses/borrowers with low credit score to avail it.

The loan requirement can occur anytime, while you may or may not have time in hand to correct the credit score. As a result, it is recommended to take slow and steady steps.