Usually, your personal credit score is different from your business’ score. CIBIL decides different ways to determine the credit score in both cases. You might think that your personal credit score may have no impact on your business. But, it is not true in most cases, especially in the case of a small business.
Before answering why? It is necessary to understand why a credit score is needed at all. Lenders use a credit score to determine application approval regarding credit card or loan application. It helps in determining the interest rate at which the lender should provide loans. In a nutshell, you can say that a credit score is a critical component in determining whether your loan application gets rejected or approved. A low credit score states a high-risk factor. Thus banks will either deny or provide business loans in India at high-interest rates. So, it would be best if you focus on improving your credit scores.
How Does A Personal Credit Score Make An Impact On Your Loan Application?
When setting up a business, you might assume that the identity you have created for your business and yourself is entirely different. But, in the case of small businesses, lenders take a close look at your personal finances before arriving at a decision. The company founder and co-founders are considered to be the mirror face of the business.
Sometimes, the financial information of the company is not enough for lenders. It is true in cases when you do not have existing relationships with the bank. Moreover, a lender finds a sort of relief if you have a good personal credit score. You would think that it should not happen, but for the lenders, it is crucial to know the personal credit profile when your business is in the early stages. So, maintaining your personal credit score can benefit you in availing a business loan in India.
In many cases, lenders would want to know the track record of the business owner. They look at the business loan documents and check the credibility of its owner to make their decision of accepting or rejecting the loan application. So, what kind of businesses get impacted by the personal score of owners?
- Sole proprietorship business:In companies having single founders, the personal credit score plays a crucial role in the loan application process in India. The law makes the sole founders of a company liable to the debts of the business. Thus, the lender looks at your personal credit score in this category of companies.
- Partnership business:In partnership businesses, personal credit score matters in the same way as the sole business category. Liability of the debt on the owner of the company is limited to a certain extent in partnership businesses. The lenders often request the credit scores of partners along with business loan applications.
- Limited company:The businesses of this category have their own identity. The shareholders are not liable to the loan of these companies. However, banks still need to know the credit score of the directors and business owner.
So, the chances of request for a personal credit score is quite high if you want to raise funds for your business by availing a business loan in India, especially in the case of small businesses. Moreover, you should make sure to have all the required business loan documents as they might be requested along with your personal credit score. So, to be able to avail good business loans, make sure to keep your personal score in a good state.