Getting a business loan can be a piece of cake if your business credit score is in good health. But have you ever wondered why your personal credit score is part of a business loan decision? When you apply for a business loan, the lender also checks the personal credit score of the applicant (usually the business owner) before sanctioning the loan.
This can be the case for newly started businesses as well as for those early-stage businesses looking for their first business loan.
In this article, we examine why personal credit scores play a crucial role in determining the outcome of your business loan.
Why do personal credit scores matter for business loans?
Your personal credit score is basically a mirrored image of how you handle your personal credit obligations. However, some people are of the opinion that your personal credit scores aren’t relevant and shouldn’t reflect how your business handles its business credit obligations.
However, while reviewing one’s business loan application, many lenders consider checking the personal credit scores as well. So it’s crucial to understand how the personal score is created, why it is considered when you apply for a loan, and what you can do to improve it.
Small business owners often opt for loans which cater to their needs such as expansion of their business. These loans are most apt for small business owners. Business loans are offered by many banks at competitive interest rates with attractive benefits such as instant approval and quick disbursal of the loan amount.
Banks mostly check for the credit score of the business while reviewing their loan application. Some lenders even check for personal credit scores while some only stick to business credit scores. This is done to analyze the overall creditworthiness of the borrowers.
How is the personal credit score calculated?
Many ingredients go into this dish. Credit rating agencies get the report from lenders on a monthly basis or once in three months. Based on this they calculate and project the credit scores. Now the major criteria for calculating the credit scores are basically your regular credit related activities such as credit card payments, loan repayment, credit history, utilization of credit and credit duration.
A credit score is a way to measure the financial capacity of a borrower to repay the borrowed amount based on the financial history of the borrower. A credit score ranges between 300 and 900. Higher the score, better the creditworthiness of the borrower.
The Know Hows of Credit Scores
The credit bureaus capture your personal information like name, date of birth, address, employment, etc to calculate your score. They will also include any information reported to them by your lenders. Information available within the public record such as judgments or bankruptcy will also be included on your credit reports and factored into your personal credit score. And any time you apply for additional credit that will also be reflected on your credit report.
Here is what a potential lender sees when they look at your credit scores:
300-579 (Very Poor): Though this category is considered highly risky, there are some financing available for borrowers with this credit score. But the loan option is limited and comes with higher interest rates. It’s very unlikely this borrower would be able to qualify for a traditional bank loan or a loan.
580-669 (Fair): A probable moderate risk zone. Chances of getting a small business loan may be possible but one can’t expect the best interest rates. In this zone you will have little to none loan options and credit facilities. Most traditional creditors won’t prefer to offer you loans in this category. Generally, 660 is the average that is considered to offer loans.
670-739 (Good): This is considered a good score and many in India fall within this range. A borrower with this type of score can expect to see more options and more approvals.
740-799 (Very Good): at this level you will be considered a low risk borrower and will have the advantage of loan options with best possible interest rate just about anywhere. With this credit score you can choose the best business loan options depending upon your need.
800-900 (Exceptional): Imagine having a business class ticket and yummy treats coming your way. Not exaggerating. That’s how having a credit score above 800 will look like. You can choose the best suited options with your choice of lender here.
Tips to Improve Personal Credit Scores
You need to work on boosting your personal credit scores, if you want your business loans approved and enjoy the best possible interest rates on business loans. Here are some tips to improve your personal credit scores.
- Check your credit scores regularly
Checking your credit scores can give you accurate knowledge on your scores. You can check your credit scores for free at CreditMantri website and get instant results. Also this won’t affect your credit report.
- Pay your credit card payments on time
If your existing credit card has an outstanding balance then it is important to pay it off as soon as possible. This will improve your credit scores significantly.
- Avoid maxing out your credit card
Avoid utilizing the entire credit limit on your credit card. Even if you pay off the balance regularly, maxing out your personal credit cards can negatively affect your score. If the goal is to improve your credit score, try to keep your credit usage limited.
- Pay off debts with high-interest rates
Always settle your debts to achieve good credit scores. But, remember to pay off higher-interest debt before other debts.
- Set payment reminders
Do not delay your payments. This will ensure that your credit score is maintained. Setting up payment reminders for all your credit cards, loans, and other credit accounts will help you make consistent payments.
- Check for errors in your credit report
Credit reports get affected mostly by errors. That is why you should always know what is there in your credit report. Look for any errors, and if you come across mistakes then you can raise a dispute and ensure that they are resolved.
Your personal credit score may not justify your business credit obligations but if the lenders do not have something solid to weigh on then they will mostly consider your personal credit scores. Improving personal credit scores can make you avail better business loan options.
Besides business term loans, business owners, can also avail personal loans for business. Personal loans can come very handy as they are unsecured loans and multipurpose, lenders do not enquire about the reason for availing the loan. You can avail personal loans through trusted loan aggregators like CreditMantri, that match you to the best personal loans suited for your credit profile.
A high credit score can help you avail a comparatively higher loan amount at a reduced rate of interest. So, irrespective of whether you’re applying for a business loan or a personal loan for business, work on boosting your credit scores to land the best loan deals.