How Credit Scores are Important to Business Owners

29-Sep-2018 written by : FSI-Team

Personal Loan Approved

The Indian banking system is expanding as more and more people are becoming a part of it. This in turn means more people are seeking loans to fulfill their dreams and aspirations; the lenders unlike before now rely on more objective ways of deciding whether to sanction the loan to an applicant or not. Thus the credit rating of the applicant is crucial whenever he/she applies for a loan. This is true for individuals whenever they want to apply for a loan but what about business owners?

Credit Scores and Business Owners:

Businesses like individuals may need funds from time to time; this may be for expansion reasons or to take care of working capital finance and so on. To take care of credit requirements of a business, a business loan may be sought. Just like for other loans, here too certain parameters are to be met by the applicant; one such requirement being a healthy credit score.

This brings us to the question of the importance of credit score of owners for the lending process. Businesses may be run under different types of holdings, like a sole proprietorship, partnership, a limited company and so on. If it is sole proprietorship then there is no distinction between the business and the owner, so if there is a requirement of a business loan then the credit report of the owner will be sought and the loan will be sanctioned or rejected based on that.

In the partnership type of holding also, there is no separate entity established for the business. Here the score of all partners will be of importance for getting business loans sanctioned. Next we come to a limited company format of business. Here the business is a different legal entity from its owners or those who run it. However in this scenario too, the lender can ask for the credit report of the directors or the promoters before they sanction a loan.

Why is the Credit Score Important?

As we saw in the above discussion lenders seek the report of business owners before they sanction a business loan. In the case of sole proprietorship the personal credit rating of the owner is very crucial as whether a loan is sanctioned or not will depend on his/her report as the business has no separate credit rating.

In partnerships the score of all partners assumes importance. It is possible that low score of one of the partners may jeopardize the chance of getting a loan sanctioned. A poor credit rating raises red flags in the minds of the lenders. In case of a limited company format even though the credit reports of directors/promoters may be sought but it will not be a crucial factor in decision making. Since the company is a separate legal entity there might be other parameters to base the decision on.

Thus a poor score could mean that the business (especially proprietorship and partnership) is not able to access funds when they need them. This could prove to be catastrophic for any business. This could hamper their production or operations, make them miss a business opportunity or halt their expansion plans. In the competitive world of business today even a small hitch in operations could mean losing out on the competitive advantage or suffering huge losses.

So when you take any loan, be it in your personal capacity or for your business, so remember to pay all your dues on time. Missing payments or delaying them or spending too much on your credit card impacts that CIBIL score calculations and can ruin your chances of getting credit in the future.



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