25-Aug-2018 written by : FSI-Team
If you apply for a personal loan and you have a low score or if you are planning to take a home loan but your credit rating is low then your loan application is likely to get rejected. If you plan to approach some lender who is willing to offer loans even at a low score then you are likely to a pay high interest rate for these loans. However if you are applying for a business loan then is your personal credit rating relevant or not? One would assume business finances are separate from personal finance so the individual score have no bearing on business loan; however this is not true in all cases.
Lenders want to be sure about the creditworthiness of the borrower when they extend credit to them. Looking at the credit score lets them assess the fact whether a borrower can be trusted or not to repay the loan in a timely manner. Thus when you apply for a business loan then does the financial institution check your personal score. In case of sole proprietorship there is no distinction between the owner and the business so the lender will have to assess the creditworthiness of the borrower (for this they will access the owner's CIR) who is also the business owner in order to reach a conclusion whether to accept their loan application or not. The owner is wholly and solely responsible for repaying the loan and thus his credit rating is important.
This may happen in the case of partnerships too as the lender would want to be sure about the personal finances of the partners to make sure if they can be trusted to repay a loan or not. Credit scores not only reveal about the financial aspect of an individual but it also tells if the individual is disciplined and honest enough to repay the dues. If they do not exhibit these traits in the handling of their personal finance then they cannot be expected to do so when they borrow for their business.
Another reason for considering the personal score of an individual for a business loan may be because there may not be enough information for the business to reach a conclusion as the business may be new or there may not be enough credit trail for the business. When the business owner has no prior relationship with the bank then they might want to be extra sure before sanctioning a business loan and will look at the individual score of the businessman to assess his credit worthiness.
Unlike in the case of sole proprietorship and partnership there may be situations when the individual score may not impact the business loan, this is the case for limited companies. Here the company is created as a separate entity then its board members or those running it or owning it. Thus when a business loan is sanctioned for limited companies the credit report of the management is generally not sought as the directors and owners have a limited liability, they are personally not liable to repay the loans that the business has taken. The business as a separate entity is responsible to repay the loans that it takes.
However in the case of a private limited company, sometimes the lenders may ask for the credit report of the directors, in this case the low CIBIL score of one or more than one may impact the loan process to some extent.
A healthy credit rating is an indicator of sound financial health, thus whether one needs a loan or not, it is a good idea to be responsible borrower so that you have a good credit score.