Any business owner would be wondering why the lenders are looking for their credit scores. In the ordinary course of business, your personal credit score is different than your business credit score. Both of them have their way of calculating the score, and the score range is entirely different for agencies like CIBIL. It makes sense when they review your business plan, business’ financial, and your business credit score. It is incorrect to assume that your personal credit score has no impact on your business, usually when you are the owner of a small business.
There are various aspects to check before availing business loan online. Credit rating is one of them. Now the question is why is credit score so important for getting any loan? What is an ideal CIBIL score required for approval of the loan? Read this article to know all the answers of your questions.
Why Do You Need A Credit Score?
It is very important to understand the need for the credit score while applying for a loan. Credit score depicts the borrower’s creditworthiness, i.e. their ability to pay back a loan. This is true that when you are a new business owner with no business loan in your name, then the sole source to trust your capacity and capability is your personal credit score. Credit scores help the lenders to arrive at a decision regarding your loan application. Based on the credit score, the risk of dealing with the customer is determined. These scores also assess the rate of interest. With a bad score, you may get a loan, but you are considered risky, and the rate of interest tends to be high. When you have a good score, the scope of getting the loan is bright, and your interest rate tends to be less.
Proper submission of business loan documents and timely repayment gives a flattering shape to the credit history of the borrowers.
Significance of Credit score while applying for a business loan
Whenever you plan to set up a business and create a business structure, you consider yourself and your business a different entity from one another. In a small business structure, usually, the founder is the heart and soul of the business entity. This gives a solid base to the lenders to look at the founder’s personal finances and then arrive at some decision.
There are reasons why the credit score tends to be a significant factor while lending. For one, when it is your first relationship with the lender, they might want to know the viability and capability of your business based on your management of personal finances. Another when the company is a new one and has no transaction history or any other information available, the lenders may look for your personal score to arrive at a conclusion. When the borrower maintains a satisfactory personal score, the lenders are at peace while lending the loan.
Business structures where credit score can affect the loan application
Under company law, piercing the corporate veil or lifting the corporate veil. It is in use when cases of fraud and impropriety are under consideration. It is a legal decision to treat the rights or duties of a corporation as that of its shareholders. There are cases where lenders want to see the transaction history of the business owner, thereby treating the business entity and the owner at par.
For which business structures does your credit score start affecting your business loan application?
A limited company has its own identity, the liability of the company is not the liability of its shareholders; in this case, the lenders can ask upfront for the personal credit scores of the directors and owner of the company.
In a partnership form of business, the partners and the partnership firm are considered the same entity. The liability of the partnership business is the liability of the partners. The personal assets of the partners are used to make the due payment. Thus, the credit score of each partner matters while lending the loan to a partnership firm.
Under a sole proprietorship form of business, the personal credit score is the business credit score. The sole proprietorship is a business structure where the business and the owner are the same entity. Under the law, the sole proprietor is liable to pay off all the debts for the company.
Your personal credit score might not reflect the viability of your business, but it is the best representation of the management of your personal finances and your creditworthiness. If you can’t handle your personal finances well, a lender would assume you would be unable to manage your business finances well. The fact to keep in mind is that personal credit score, and the business credit score doesn’t affect each other. Thus, this credit score plays a very significant role in the approval of your loan application for business purposes.