How Do Business Loans Affect Your CIBIL Score? How Can I Raise My CIBIL Score Fast?

An entrepreneur is intrinsically connected to his or her business whether one is actively managing the affairs of the enterprise or even if one is in a non-executive role as is often the case as a business expands. But for smaller enterprises, the business is firmly associated with the owner.

In fact, when a small business looks to take an unsecured loan, the lender uses the credit history of the business owner as a primary filter to process the loan application.

As a result, if the credit score or the CIBIL score of the business owner is on the lower side, the business may struggle to get a loan sanctioned. Even if it does manage to get the money, it comes loaded with a higher rate of interest.

On the other hand, if the CIBIL score of the business owner is on the higher end of the range, there is a higher chance of a swift loan approval and that too at sweet terms with lower rates and better repayment covenants.

It is notable that this interlinkage between a business loan and the CIBIL score of the owner is not just a one-sided affair. Indeed, business loans and the type of enterprise it is for also affect the personal CIBIL score of the owner.

How A Business Loan Affects Personal CIBIL Score

Technically, a business loan should not be seen from the same lens as a personal loan. But then some business ventures are almost entirely run by the entrepreneurs themselves.

• Proprietorship: Many people run a solo venture, or a sole proprietorship in legal terms. Think of a doctor or a neighbourhood shop owner. If such a person avails a business loan, it is considered as good as a personal loan. A default on the business loan has direct repercussions on the business owner’s personal CIBIL score.
• Partnership: This is similar to a proprietorship even as there are other partners and each of them have a ‘limited liability’ towards the company.
• Limited Company: In the case of the private limited company, the business owner’s affairs are considered separate from that of the legal entity.

On paper, in the case of a private limited company the business loan shouldn’t have an impact on the personal CIBIL score of the business owner. But lenders could still check the state of those loans for making personal loans, for instance, to the business owner.

How To Push Up CIBIL Score Quickly

The CIBIL score is a three-digit number that represents the credit history, especially for the last 36 months, of a person. This lies between 300 and 900. The higher this is on the charts, the easier it is to get a loan and vice versa.

Lenders use this to assess if the borrower should be trusted with the expectation that the loan would be returned in full along with the interest charges for the period.

They typically prefer to lend to those with a CIBIL score above 750 but a lower score doesn’t necessarily disqualify one from availing a loan.

In fact, those with 600 or even 550 can hope to get a loan provided they are able to convince the lender that they can pay back thanks to their cash flows and by shopping around to find lenders who are more flexible and customer friendly in their practices. The good news is that one is not left to the mercy of fate and one can improve their score.

• Repay:

One way to quickly push up the score is to decrease the total outstanding loan, if any, by repaying part or in full. If one is holding one unsecured loan and one collateral-backed loan, one should repay the unsecured loan first.

• ‘Unmax’ The Credit Card:

Most people use one or more credit cards and the plastic money, since it is also another form of debt, is also considered while generating the CIBIL score. If a person often utilises the maximum amount of the credit available on the card it decreases the CIBIL score. So, if one pays back the outstanding dues it can quickly push up the creditworthiness and thereby the CIBIL score.

• Correct The Score:

Another quickfire way to improve the score is to get a correction made in the score. Some times a discrepancy occurs in the generation of the credit score due to improper updation of records. This could be because a loan is incorrectly marked under a person or a loan already repaid isn’t reflected in the report. Similarly, the score may have factored more credit cards than one holds. All this can be checked in the credit report that comes along with the score. One can flag and get it corrected with appropriate proofs.

Conclusion

A business person’s personal life is intrinsically linked to the venture he or she runs. This is not just in terms of getting a business loan where lenders factor in the personal CIBIL score of the business owner but also the other way round. This is especially so for proprietorships as they are considered almost identical to the business entity.

One important aspect is that the CIBIL score can be improved by prepayments of outstanding debt, reducing credit card spends and getting any correction made to the credit report.

IIFL Finance offers business as well as personal loans at attractive interest rates with a quick turnaround time via a digital application process. It lends up to Rs 30 lakh for businesses without any collateral and up to Rs 5 lakh in personal loan to borrowers.