Does your personal credit score affect your business loan application?

• What is CIBIL Score? 
• Will my personal credit score affect the success of my business loan application? 
• How are personal credit scores and business credit scores calculated? 
• What type of business loans can I avail without having to divulge my personal credit score?

If you have been troubled with these questions, this blog post is for you. Today we answer all the above questions, so that you get the clarity you need regarding business loans.  There is a general lack of clarity regarding the application for a business loan. One of the primary questions that business owners have is whether their personal credit score can affect their business loan application. First, let’s understand the distinctions between a person’s personal credit score vs their business credit score.  

Personal Credit Score vs Business Credit Score

When a person refers to their “CIBIL Score” it is just another way of saying credit score. CIBIL is simply the agency in India that keeps track of credit scores, of both business and persons.  A person’s credit score is calculated as a function of multiple factors, which are listed in the table below.

	Personal Credit Score	Business Credit Score
Where do agencies get their information from?	Court records, credit card issuers, lenders and collection agencies.	Public records, lenders, vendors and personal credit reports.
What factors affect the credit score calculation?	Past performance or Payment history Default accounts Length of credit history Different kinds of loans undertaken Recent credit behaviour	Tax filing details Complete business profile  Loan and credit history, including if the company has been guarantor for a loan

Facts that will dictate whether your personal credit score has a consequence on your business or not:

1. Type of business 
2. Type of loan applying for  

The impact of personal Credit score for a business loan application summarized:

In the below matrix, the boxes with the ticks are combinations of business type and loan type where the personal credit score will be needed, and the crosses are combinations of business type and loan type where a person’s personal credit score will NOT be needed.

The value of a personal credit score in different types of businesses:

1. Sole proprietorship: In this case, since the business owner is the single heart of the business, banks and other lenders will definitely consider the business owner’s personal credit score. 
2. Partnership: Since a partnership is just a step above sole proprietorship, your personal loan will once again come into play, along with your partner’s.
3. Private or Public Limited: These are companies that will likely have a business credit score of their own, determined by the business’s past performance. 
4. Non-Profit organizations: NFP organizations will require personal loans depending on how old the organization is. For new businesses, the personal credit score of the owner will matter.

 

The value of a personal credit score in different forms of credit:

1. Short term loans (including OD): Lenders will certainly have a look at the borrower’s personal credit score.
2. Long term loans: Without any collateral, a lending institution will definitely check for the owner’s personal credit score.
3. Equipment financing:  There’s a good chance that the personal credit score of the owner will not be looked at. 
4. Invoice financing: Since this loan is against the collateral of the account receivable, it is very likely that your personal credit score will not be looked at. 

  As you can see, the value of a personal credit score while applying for a business loan depends on several factors. While this blog aims at giving a good overview for you to get started. Note that you should always consult an advisor in person before going ahead with a business loan.  Every loan application comes with its own unique terms and conditions, hence it comes down to the discretion of the bank or the lending institution.    UpScale by CredAble, has disbursed numerous collateral-free business loans to small businesses since its inception in October, 2021. In addition, UpScale being a product from Fintech giant CredAble, has 5 years worth of insights and experience gained regarding unsecured lending.  Think Business Growth, Think UpScale