Although business and personal credit scores may sound alike, they are different in many ways. Let us discuss more these credit scores in detail.
Personal credit score vs business credit score
A credit score is a three-digit number, ranging from 300-900, that reflects your’ and your business organisation’s creditworthiness. Today, credit score plays a vital role in not only getting a loan application sanctioned but serving many other purposes as well.
In India, there are six major credit bureaus that compute the credit score and maintain the records of credit transactions undertaken by businesses and individuals. The biggest and most popular credit bureau is CIBIL.
What is a personal credit score?
A personal credit score is a three-digit number ranging from 300 to 900. The closer the score is to 900, the higher your creditworthiness. On the contrary, most financial institutions consider a credit score below 600 as a poor score. In such cases, the lender considers you a high-risk borrower and can reject your loan application.
Almost all lenders have a minimum credit score requirement for approving loans. A personal credit score of 750+ is considered a good score for sanctioning unsecured loans. The credit bureaus assign your credit score based on your repayment history and credit behaviour. It takes time to build a high score.
There are five critical factors that affect your personal credit score. These are listed below:
- Your annual/monthly income vs the debt
- Credit utilisation, i.e., how much credit you have taken out of the maximum limit you have
- Length of your credit history
- The new credit or loan you have applied for
- Credit mix. The lenders check if you have a good mix of secured and unsecured loans
These factors have a 30-35% weightage on your credit score. So, when you check your consumer credit report, and find that the credit score for the loan is low or does not meet the minimum score required by the lender, you must pay off the past dues immediately. This will reflect your good credit behaviour, and you may get your loan approved without any hassles.
What is a business credit score?
Lenders use the business credit score as a yardstick to determine the credit score of business organisations. However, the computation process and the factors affecting business credit scores are entirely different from personal credit scores. The critical factors that affect business credit scores are:
· The number of years the business has been functional
· New credit line you have availed
· Credit lines that you have availed in the past nine months
· Repayment history
· Collections and lien of the past seven years
Apart from applying for a loan, a high commercial credit score is vital for operating a business smoothly. For example, if you want to collaborate with a new vendor or supplier, they may review your business credit report before entering a contract.
If you have a high business credit score, you may be in an excellent position to negotiate better deals with them and get credit for a more extended period. Sometimes, a business credit score is referred to as credit rating as the bureaus assign the company a number between 1 and 10 to reflect the business’ creditworthiness, with 10 being the most creditworthy organisation.
When do lenders check personal credit scores for approving business loans?
Generally, personal and business credit scores are not connected. However, some lenders tend to check the personal credit score of the business owner in the following cases:
· When the business entity is a small business that falls under MSME (Micro, Small, and Medium Enterprises) category
· The business is new and does not have a long credit history that they can refer to
· The business is a sole proprietorship
How to improve your eligibility for a loan?
When you apply for a loan, the lenders do a thorough personal credit report check and business credit score check. But the credit score is not the only thing that lenders consider while approving a loan.
Some of the other factors that may affect your loan eligibility are:
· Debt-to-income ratio
The loan eligibility mainly depends on your financial condition and repayment capacity. For example, if the debt-to-income ratio is more than 50% of the gross annual income, the lender may consider you a high-risk borrower, and you may be considered ineligible to get loans or lines of credit.
· Documentation
When you apply for any loan, you must comply with the lender’s documentation process. It is the key to getting your loan approved faster. If you fail to provide or don’t have any documents, it can affect your loan eligibility, and you may have to pay a higher interest rate.
It is advisable to know about the documents the lender requires beforehand and keep them handy to avoid last-minute hassles and delays in the approval process.
Conclusion
Maintaining a good credit score is vital for businesses and individuals, as it significantly impacts loan eligibility. If you have a good credit score, you can get a personal or business loan from Tata Capital, one of the leading lenders in India that offer a variety of loans at affordable interest rate and flexible repayment terms.