6 Tips to get a loan for business while having bad credit

Loans are the lifeblood of any business enterprise. However, a bad credit history can act as a deterrent when you apply for a business loan. The survey conducted by Home Credit India, across seven cities reveals that a whopping 68% of the borrowers are unaware of their credit score.

What is a credit score?

In India, the Credit Information Bureau India Limited (CIBIL) assigns the credit score. The CIBIL Transunion score is a 3 digit number that varies in the range of 300 to 900. The CIBIL score is calculated based on the repayment history, credit mix, multiple enquiries and credit utilisation.

A credit score is one of the important parameters used by lenders to gauge a loan applicant’s creditworthiness. In India, a credit score of 750 or above is considered good. Having a decent score makes it easy for an entrepreneur to secure loans. However, a credit score anywhere in the range of 300 to 550 can land you in trouble. The chances of getting a business loan will be quite low. However, despite having a bad credit history, there are some methods by which you can secure a business loan.

6 tips to get business loans with a poor credit history

Let’s delve deep into the 6 tips to overcome the threat posed by poor credit history and still source the necessary finances for your business.

1. Fix the errors associated with a credit report - An error in the credit report can adversely affect your credit score. This, in turn, adversely affects the possibility of securing a loan as well. The study conducted by Credit Sudhaar indicates that there is some kind of error associated with one out of four credit reports. The more shocking finding is that one out of five has some major mistakes.

Hence the first step would be to check whether there are any errors with your credit report. Some commonly found errors are failure to update the current account balance, amount overdue, outstanding loans mentioned incorrectly etc. In case of errors, raise a dispute with the concerned department. Getting those errors fixed will naturally improve your credit score and increase the chances of getting approval for the loan.

2. Make use of secured loans - While applying for a secured loan (a kind of business loan), you need to submit collateral or security with the bank or financial institution. It can be a commercial or residential property, raw materials, inventory, gold, machinery and equipment etc. In this case, the loan amount sanctioned depends on the value of the collateral submitted.

With a secured loan, even if the borrower fails to repay the loan amount, the lender always has the option to liquidate the asset. Hence even if your credit score is weak, you still stand a chance of getting the necessary funds by applying for a secured loan.

3. Check the credit score requirements of the lenders - Before applying for the loan, carefully review the credit score requirements set by each lender. If you are quite certain that you cannot meet the criteria prescribed by the particular lender, it is better not to submit your loan application. The reason is that while reviewing a loan application, lenders will conduct a hard enquiry.

Once you submit a loan application, the bank will retrieve your credit report from the credit bureau to evaluate your creditworthiness. It will lead to a reduction in your credit score.

Hence the higher the number of loan applications, the greater the chances of your credit score getting adversely affected. Hence, the best strategy would be to conduct your due diligence before applying for a loan. Identify the lenders who are likely to approve your loan application. Apply for a loan only with those lenders. It will save you from the risk of reducing credit score due to a higher number of loan rejections.

4. Have a solid business plan in place - Before proceeding with the loan application, ensure that you have a concrete business plan in place. The business plan will act as a guide for you and your subordinates in the future course of time. Before approving the loan, the lender reviews your business plan carefully.

From the lender’s perspective, they need to ensure that your business strategy is viable and you have the potential to repay the loan amount. Hence, make sure that you clearly state your strategy in the business plan. The other important requirements are precise financial projections and a solid cash flow analysis.

5. Apply for a loan from an NBFC or P2P lending platform - As discussed earlier, in the case of banks, they conduct stringent evaluations of a credit report in the case of banks. It comes with the risk of a reduction in your credit score. However, Non-Banking Financial Companies (NBFCs) have more relaxed policies with credit score and credit rating. They offer unsecured loans, and there is no need to submit any collateral. To evaluate your creditworthiness, they combine both data and technology. Though the interest rates are higher, it’s far easier to secure a loan from NBFCs.

One more option is to apply for a loan with a Peer-to-peer lending platform (P2P). As per the report by Business Standard in 2020, P2P lending has achieved a growth of 10 times in just one year on a year-on-year basis. Though the loan amount offered by such platforms are quite small, they don’t ask for collateral or security from the loan applicants. As in the case of NBFCs, the interest rates charged by P2P platforms are also quite high.

6. Go for a joint loan or find a guarantor - Another option for those with a low credit score is to make use of a joint loan. Here you can apply for the loan jointly with another person (spouse or family member) with a good credit score. The probability of getting the loan approved is higher in joint loans as the other person will play the role of a co-applicant to the borrower who is struggling with a weak credit score.

To improve the chances of loan approval, one more option is to add a guarantor. Ensure that your guarantor has a high credit score to reduce the credit risk for the bank or financial institution providing the loan. The reason is that in case there is a loan default by the main borrower, the guarantor becomes liable to repay the loan amount.

Parting Words

For business establishments, external financing is of utmost importance for expanding their operations. However, a poor credit score can play spoilsport while applying for a loan. With the 6 tips discussed above, now you can easily tide over the challenges faced by a bad credit score.

Also Read:

1) How to Identify Gaps in the Market for Your Small Business?
2) How to Start a Furniture Export Business?
3) 8 Simple Steps To Pay Employees Of Small Business
4) How to do a Perfect Audit in your Business?

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FAQs

Q. How can I quickly improve my credit score?

Ans. Timely payment of bills and paying the balance amounts on your credit cards are the two most effective methods to increase your credit score. Once in 30 days, the issuers inform the credit bureaus about your payment behaviour. Hence the above-mentioned two steps can help boost your credit score quickly.

Q. What is the ideal credit score in case of a business loan?

Ans. In the case of a collateral-free business loan, it’s recommended to have a credit score of 700 or above. If the business loan is secured, then there are chances of getting the loan approved even with a 600 to 700.

Q. For how long CIBIL will maintain the list of defaulters?

Ans. CIBIL prepares a credit information report containing the details of an individual’s credit and default history. From the date of the first late report, they maintain these details for 7 years.

Q. Is it possible to check my credit score for free?

Ans. Go to the website www.cibil.com and request the CIBIL report. Enter your personal details such as name, gender, PAN card number, date of birth etc. For accessing the credit report, you need to clear the personal verification process and pay a fee.