Businesses often require finance to initiate or maintain operations, increase their working capital, expand to a new location, and invest in equipment, etc .. Business loans in India are normally easy to obtain, given that a multitude of lenders are willing to partner with business owners with a credit score of 720 or higher, along with a stable income, complemented with a viable business plan.
But what if your credit score is below 720? In layman terms, you have a relatively weaker credit score, increasing the lending risk to lenders. This means that banks would hesitate to extend a business loan at any interest rates in India. A weak credit score indicates that you might have failed to repay loans, regularly been late on payments or declared bankruptcy.
Impact of Bad Credit on Your Bank Loan Application for Business Finance
Bad credit appears in the form of a low credit score. CIBIL, India’s first credit information company, collects, analyzes and maintains the credit history of individuals and legal entities, for organizations that have more than 500 employees. This analysis and credit history is used to come up with a score for you. This data and score is then made available to banks and other financial institutions, although only upon request. Using this data, banks rank individuals on a standard scale, thus deciding whether they can give you a loan or not, or if they did, would you be likely to repay the loan on time or whether you were likely to default, based on your credit history. Banks will never lend money to an individual with a bad CIBIL score.
In case a bank rejects the application for business financing because of a poor CIBIL score, individuals often approach private lenders who, however, charge exorbitant interest rates, while demanding collateral in return for the loan.
5 Ways to Get Business Financing even with a Bad CIBIL Score
1. Family & Friends
Entrepreneurship is a fascinating idea, not only for you but for the people around you as well. There are chances your relatives and friends would want to help you in your dream business and lend the money to finance your operations or other needs, without any interest or at a nominal rate of interest. They might not be interested in your credit score, if your business concept sounds good to them. In addition, if you have a good reputation and strong relationships with your immediate family and close friends with a better credit score, they can assist you in a joint loan, becoming a co-signer. This act increases the chances of the loan being sanctioned by a traditional bank. They could also stand as a guarantor for the business loan applied by you.
2. Credit Card Financing
Owners of start-ups usually have personal credit cards but might not yet have a business credit card. If they opt to use their personal credit cards for financing their startup, they become personally liable for any debt they incur, which could be quite a burden for the owner of a promising start-up. Be cautious as you use your personal credit card to finance business expenses.
3. Secured Loans
Trying to get a personal loan from traditional banks without a CIBIL credit score? Well, the chances are low. However, you can get a secured loan without a CIBIL score. Secured loans are a financing option in which the borrower pledges some asset as collateral for the money lent by the financier. Assets owned by you like gold, insurance policies, fixed deposits or PPFs, as well as real estate, provide sufficient security for the bank, making it easier to get an approval for a secured loan.
An interesting method of raising capital through the collective effort of your friends, family, customers, and individual investors, crowdfunding is the opposite of the mainstream approach to business finance. This is unlike the traditional approach of raising funds, wherein the entrepreneur needs to conduct market research, create a business plan and sell their idea to a few key players, including wealthy institutions, banks or venture capital firms.
5. Unsecured Loans
An unsecured loan is supported only by the borrower's creditworthiness, rather than by any type of collateral. FinTech based money lending, with flexible repayment options, have become relevant finance options to SMEs and an excellent source of capital for those with poor credit scores. The FinTech firm will use decision sciences and technology to determine your creditworthiness, offering innovative financial products, taking into account the nature of your business.
- Merchant Cash Advance: This type of unsecured loan is especially designed for businesses looking for a short term investment and are actively using card payment devices or Point-of-Sale (POS) machines to make cashless transactions. Fintech lenders' partnerships with multiple POS card machine vendors can help you access customized working capital solutions.
- Supply Chain Finance: This product is developed for enterprises that operate using invoices as a financial instrument. Any delay in payment can severely harm cash flow for their business. In supply chain finance, the lender offers finance to the borrower on the basis of the bills receivable of the borrower. SMEs applying for this form of financing can get a loan of up to 80% of the value of their invoices or bills.
- Pay Later : Pay later finance provides a predefined credit capacity, unique to each applicant. The borrower can make multiple drawdowns from the predetermined credit facility and interest is applicable only on the utilized amount. It is an ideal kind of loan for SMEs that need to make multiple supplier payments.
A low or bad credit rating effectively compromises your chances of getting a loan from a traditional financial institution. Fortunately, there are non-traditional means of accessing business loans at affordable rates of interest, irrespective of what your credit score is.