Key TakeAways
- Good credit scores (700+) improve MSME loan approval and terms.
- CIBIL score is crucial but not the only factor lenders consider.
- Fintech lenders like BigMudra use alternate data beyond credit scores.
- Low credit score? GST, bank statements, and cash flow can still help.
- Check and improve your credit score regularly for better funding chances.
- BigMudra look beyond credit scores and consider GST, bank statements, and cash flow.
Many MSMEs struggle to secure funding due to poor or misunderstood credit scores. Running a small business in India is no easy task. From managing daily operations to finding reliable suppliers, MSME owners juggle countless responsibilities.
But perhaps the biggest challenge many face is securing adequate funding to grow their business. Time and again, business owners find themselves rejected by banks or offered loans at sky-high interest rates, often due to their credit scores.
Many don’t even understand what these numbers mean or how they impact their loan applications.
You can get loans more quickly and at better conditions if your credit score is good. Here’s what you should know: changing and improving your credit scores can seriously improve how much money you get from lenders.
Being approved for a loan is only the first benefit to having a high credit score. This score may also get you better deals on loans, higher loan values, and faster turnaround periods. You can use your money and save time since online banking makes everything quick.
This blog breaks down what credit scores are, why they matter, and how BigMudra evaluates MSME borrowers with or without strong credit profiles.
We will explain how credit score India works and break the mystery for owners of micro, small, and medium enterprises. We will tell you what credit scores are, how they are used in India, and what part they play in the decisions made by lenders about your application.
We will also go through how innovators like BigMudra give MSMEs a chance for financing by considering additional sources of information instead of only relying on credit scores.
Whether you are a seasoned business owner or just starting your entrepreneurial journey, this guide will help you understand the credit world and make informed decisions about your business financing.
What is a Credit Score? (Explained for MSME Owners)
Your credit score reflects your financial journey of your business. It is a financial report card of your business which is used by lenders for your credit check to determine your loan eligibility.
Simple Definition of Credit Scores
Your credit score acts as your financial report card. For an example: just like your school exam report card showed teachers and parents just to know how well you were doing during your academic year. In the same way, your credit score shows lenders how well you manage your money and debts.
If you are still wondering what is it, it’s a three digit number that ranges from 300 to 900, with a higher number indicating your creditworthiness.
When you apply for a loan, lenders want to know one thing: will you pay back the money you borrow? Your credit score check helps them answer this question quickly. It’s calculated based on your past borrowing and repayment behaviour, giving lenders a snapshot of your financial reliability.
If you are wondering, lenders access your credit report, they usually use a credit company called CIBIL, and there are many others.
Role of CIBIL in India
The Credit Information Bureau (India) Limited, which is known as CIBIL, is the major credit company in India. In India, people use the term credit score most commonly to mean CIBIL score. CIBIL checks your loan and credit card payments as well as your financial history with the banks across the nation.
Whenever you apply for any loan or credit card, the CIBIL will be informed by the lender. Payments that are made on time add positive points to your score. Missing payments or not paying your loans back can reduce your credit score. Lenders can decide if they should lend money using this system.
CIBIL is responsible for creating credit reports for individuals as well as business credit history. When seeking loans, MSME owners’ personal credit history matters a lot because small business money and the owner’s personal money are closely connected.
Difference Between Credit Rating and Credit Score
Many people use the terms “credit rating” and “credit score” interchangeably, but they are actually different things. A credit score is a number (like 750), while a credit rating is usually a letter grade or category (like A, B, C, or AAA, AA, A).
Credit scores are typically used for individuals and small businesses, while credit ratings are more common for large corporations and government entities. For MSME owners, you will mostly deal with credit scores, though some larger MSMEs might also have credit ratings from agencies like CRISIL or ICRA.
The credit company that generates your score uses complex algorithms to analyze your financial behaviour. They look at factors like your payment history, the amount you owe, length of credit history, types of credit used, and recent credit inquiries.
What is a Good CIBIL Score for MSME Loans?
Credit scores play a vital role in determining your creditworthiness. However, it is important to know what really a good CIBIL score is:
Score Ranges (300–900)
Credit scores in India range from 300 to 900. Here’s how these ranges are typically interpreted:
- 300-549: Poor credit score. Loan approval is very difficult, and if approved, you will face high interest rates.
- 550-649: Fair credit score. Limited loan options with higher interest rates.
- 650-699: Good CIBIL score. Better loan options with moderate interest rates.
- 700-749: Very good credit score. Good loan options with competitive interest rates.
- 750-900: Excellent credit score which can be considered as CIBIL score highest. Best loan options with the lowest interest rates.
What Counts as a Good CIBIL Score
Usually, for MSME loans, a good CIBIL score starts at 700 or higher. The principles of good credit changes depending on the lender and type of loan you have in your mind. Here’s what different score ranges mean for MSME borrowers:
When your score is between 700 and 749, your chances of lender approval are pretty good. Lenders are likely to support your application, even though they could ask further questions about your business and private finances.
Scores of 750-799 are known as excellent scores. When you access credit through banks, you get to enjoy better interest rates and favorable loan conditions. In the eyes of lenders, you are considered to be a safe borrower.
With this score above 800, you are part of the elite group of borrowers. You will enjoy strong interest rates, highest loan amounts, and your loan will finish being processed as quickly as possible. The highest category of CIBIL score gives you significant benefits.
Importance of Credit Limit Utilization
One crucial factor that affects your credit score is your credit limit utilization ratio. This is the percentage of your available credit that you are actually using. For example, if you have a credit card with a ₹1,00,000 limit and you typically maintain a balance of ₹30,000, your utilization ratio is 30%.
Ideally, you should keep your credit utilization below 30% of your available credit limit. Even better is keeping it below 10%. High utilization suggests you’re dependent on credit, which can negatively impact your score.
For MSME owners, this is particularly important because business expenses can be unpredictable. If you’re using business credit cards or lines of credit, try to pay them down regularly to maintain a low utilization ratio.
How Credit Scores Impact MSME Loan Approval
The impact of your credit score on your business loan approval is completely dependent on your financial behavior and the other three factors are mentioned below:
Effect on Loan Amount, Interest Rates, and Approval Speed
Credit score India directly influences three key aspects of your loan application:
Loan Amount: A higher credit score often translates to higher loan eligibility. Lenders are more comfortable lending larger amounts to borrowers with proven track records of repayment. For MSMEs, this could mean the difference between getting ₹5 lakhs and ₹25 lakhs for your business expansion.
Interest Rates: When an emergency arises, strong credit ratings are very important. A low interest rate on a loan can make you save lakhs compared to a loan with a higher rate. Over a ₹10 lakh loan lasting 3 years, the difference in interest rate payments alone could be over ₹ 1 lakh.
Approval Speed: Banks and financial institutions often have automated systems that quickly approve loans for borrowers with high credit scores. What might take weeks for someone with a poor score could be approved in days for someone with an excellent score.
How Banks vs Fintech Lenders Use Credit Scores
Usually, traditional banks use credit scores to make their lending decisions. Most of the lenders reject your loan application if your credit ratings fall below a specific score. This inflexible way of looking at things has meant that many MSMEs do not get formal credit.
On the other hand, fintech lenders are capable of being more flexible. Even though credit scores are still important, they tend to examine the entire business situation. They can rely on a variety of other data and better algorithms to check a person’s creditworthiness.
It is very important for MSMEs to understand this difference. Fintech lenders can give you a loan even if your lending history is not perfect, but only if your business performs well on money in and out.
Importance of a Consistent Credit Check
Regular credit check are important for several reasons. First, they help you stay aware of your credit score and identify any issues early. Second, they allow you to spot any errors in your credit report that might be dragging down your score.
In India, you can check your credit score for free once a year from each credit bureau. Many online platforms also offer free credit score checks. However, be aware that too many hard inquiries (when lenders check your score for loan applications) can temporarily lower your score.
For MSME owners, it’s recommended to check your credit score at least quarterly. This helps you track your progress and take corrective actions if needed.
Can MSMEs Get a Loan With a Low or No Credit Score?
Yes absolutely, MSMEs can get loans with low credit score or no credit score, Many lenders such as BigMudra also consider other factors like how business age, your steady cash flow and alternatively data from GST returns.
Alternatives Used by Lenders
The good news is that having a low or no credit score doesn’t necessarily mean you can’t get a loan. Modern lenders, especially those focused on MSMEs, have developed alternative methods to assess creditworthiness.
GST Analysis: Your GST returns contain lots of details that reflect your business’s activity. They can check your GST documents to judge your company’s overall earnings, development over time, and stability of activities. Filing GST returns on time and with better income each year may help make up for a low credit score.
Bank Statements: Your business bank statements tell the story of your cash flows. The standard factors reviewed by lenders include your monthly account balance, frequency of funds put in, and types of transactions. Reliable and repeated cash flows will highlight that you are able to repay debts, even despite a low credit score.
Business Cash Flow: Whereas conventional loans care about collateral and how a borrower is doing with a credit score, cash flow-based lending pays attention to your business’s ability to generate income. Having steady and reliable cash flows can sometimes make lenders consider your application even with a questionable credit history.
Credit Company Independence
Not all lenders rely solely on credit scores from traditional credit companies. Many fintech lenders have developed their own scoring models that incorporate various data points beyond traditional credit information.
These alternative scoring models might consider factors like:
- Digital payment history
- Utility bill payments
- Mobile phone usage patterns
- Social media activity
- Supplier and customer relationships
This approach is particularly beneficial for MSMEs that might not have extensive credit histories but have strong business fundamentals.
Additional Factors Lenders Consider Beyond Credit Score
Many lenders in the market also consider additional factors other than credit score such as your business age, steady monthly income, GST returns or ITR filing.
Business Vintage
Your business’s age is very important when applying for a loan. Most lenders prefer working with companies that have been around for 2-3 years, since this indicates they are stable and able to thrive. Sustaining operations in different economic conditions makes a business look less risky.
Still, it doesn’t stop new businesses from applying for loans. Some lenders focus on helping new businesses, but they could want more documents and give thicker interest rates for their loans.
Revenue Stability
Revenues that are steady are more beneficial than ones that change a lot. Lenders choose businesses where the income comes through at predictable times, even if it is not as high. By studying your financial records for at least the past 12 to 24 months, they can measure the company’s stability.
For service-based businesses, recurring revenue models (like monthly subscriptions or annual maintenance contracts) are particularly attractive to lenders. For product-based businesses, consistent sales patterns and diverse customer bases are favorable.
Udyam or GST Registration
Having proper business registrations demonstrates that you’re running a legitimate, formal business. Udyam registration (the new MSME registration) and GST registration are particularly important for accessing formal credit.
These registrations not only make you eligible for various government schemes but also provide lenders with additional verification of your business legitimacy. Many lenders require these registrations as a minimum criterion for loan approval.
ITR Filings
When you want a loan, making ITR filings each year is very important. The income tax return for the year proves that you are following all tax rules and have declared your earnings. In most cases, lenders ask for the ITR of the last 2 to 3 years.
Check that the documents for your ITR match the records you have given for your loan. When there are big mistakes, it may lead the lender to reject your loan application.
How BigMudra Assesses MSME Loan Applications
BigMudra is a platform where every business is welcome no matter if you are small or big business owners or with no credit history, you can easily apply for a quick business loan on BigMudra.
CIBIL is Important, but Not the Only Criteria
At BigMudra, we understand that credit scores play a big role. While a CIBIL score high helps your loan application to get approved quickly, however, we do not reject every application only because a score is low. As an alternative, we look at all the factors that make up your creditworthiness.
Many of the small business owners and those in rural areas may lack a credit history. However, it does not mean they are bad borrowers, it might be possible that they haven’t had the opportunity to build credit.
Use of Alternate Scoring Models
BigMudra uses proprietary scoring models that go beyond traditional credit scores or credit rating. Our algorithms analyze various data points to get a comprehensive view of your business and repayment capacity.
We might consider factors like:
- Your business’s digital footprint
- Supplier payment patterns
- Customer feedback and reviews
- Seasonal business variations
- Industry-specific factors
This approach allows us to identify creditworthy borrowers who might be overlooked by traditional lenders.
MSME-Friendly Loan Processing
We have designed our loan processing system just for MSMEs. It is clear to us that business owners are too busy to spend a lot of time on documentation.
By asking just the necessary questions, we are sure to cover everything that relates to your business. The use of technology for information verification speeds up the journey from applying for a loan until the money is sent out.
We still aim to help even if you do not have a lot of credit information, by making it fair and clear for you to secure the funds for your business.
Frequently Asked Questions (FAQ)
What is considered a good credit score for a business loan?
For business loans, a good credit score typically starts at 700. However, different lenders have different criteria. Some might approve loans for scores as low as 650, while others might require 750+. At BigMudra, we consider the complete profile of your business, so even if your score is slightly below 700, you might still be eligible if other factors are strong.
How often should I check my credit score?
Your credit score should be checked every now and then, at least once every three months. Routine check-ups will let you observe your progress and find mistakes or things affecting your score. You are allowed to get your credit score for free on request from one of the three credit bureaus, and you may also find free services online.
Does checking a credit score reduce it?
When you check your own credit score, it’s called a “soft inquiry” and doesn’t affect your score. However, when lenders check your score as part of a loan application, it’s a “hard inquiry” and can temporarily lower your score by a few points. The impact is usually minimal and temporary, but too many hard inquiries in a short period can have a more significant impact.
How long does it take to improve a CIBIL score?
Making your CIBIL score better takes time. Your financial situation could improve noticeably in a period of 3 to 6 months as long as you act responsibly with your financial behavior consistently. In most cases, you need at least 6 months and in some cases even longer for consistent improvements. Make sure you pay your bills on time, use a small portion of your credit, and do not apply for a lot of new loans.
Can I get free credit scores?
Free credit scores are available at different platforms online. It is possible to get only one free CIBIL credit report in a month. Some banks give their customers access to their credit score free of charge. The good news is that different online services and applications let you check your credit score without charge, but the scores might only approximate your real CIBIL score.
What should I do if I find errors in my credit report?
If you find errors in your credit report, you should dispute them immediately. Contact the credit bureau (CIBIL) and provide documentation to support your claim. Also, contact the lender who reported the incorrect information. Credit bureaus are required to investigate disputes and correct errors within 30 days.
How does a business credit score differ from a personal credit score?
Business credit scores are based on your company’s credit history, while personal credit scores are based on your individual credit history. However, for MSMEs, lenders often consider both scores, especially if you’re a sole proprietor or if you’ve provided personal guarantees for business loans.
Can I get a loan without any credit history?
Yes, it’s possible to get a loan without credit history, though it might be more challenging. Lenders might require additional documentation, charge higher interest rates, or ask for collateral. At BigMudra, we work with credit-thin borrowers by analyzing alternative data sources to assess creditworthiness.
Conclusion
Knowing about credit scores is very important for MSMEs in the present-day financial market. Although getting better loan terms and fast approval requires a good credit score, it is still possible if yours isn’t the highest. You should know how credit scores are build and then work at improving them consistently.
Owners of small and medium firms should make sure to stay financially disciplined. Always pay lenders on time, use little of your total credit limit, and check your credit report at least once every month to catch any mistakes. Following these simple steps gradually can boost your credit score for the better loan options.
However, don’t let a poor credit score stop you from pursuing the funding your business needs. Modern lenders like BigMudra are changing the game by looking beyond traditional credit scores. We understand that MSMEs are the backbone of the Indian economy, and we’re committed to providing access to credit based on business potential rather than just historical credit scores.
Remember, your credit score is just one factor in the lending decision. Strong business fundamentals, consistent cash flows, and a clear growth plan can often compensate for a less-than-perfect credit score. The key is to work with lenders who understand the unique challenges and opportunities that MSMEs face.
No matter if you are looking to expand your business, purchasing new equipment, or managing your working capital, understanding your credit score and working to improve your credit score is always important and beneficial. However, don’t let it be a wall between you and your business growth. With the right approach and the right lender, you can secure the funding you need to take your business to the next level.
Check your credit scores regularly, understand what factors influence them, and work with lenders who appreciate the value that MSMEs bring to the economy. Your business dreams are valid, and with proper financial planning and the right funding partner, they can become reality.
Regularly check your credit scores, know what influences them, and work with lenders who respect your credit and MSMEs’ contribution to society. Having valid business dreams means you can make them happen with proper financial plans and the help of a reliable funding source.
