How to Prepare Your MSME for Funding: A Step-by-Step Guide

Many Indian business owners avoid loans in the initial stages. Some don’t want the pressure of EMIs. Others feel they might get rejected due to lack of credit history or they have heard this: You need a good credit score to get a business loan. 

But what if you have never taken a loan before? Does that mean you can never build a credit score? 

This is one of the most common questions we hear at TallyCapital, especially from small business owners, traders, shopkeepers, and startups. 

So, let’s answer it clearly and honestly. 

 Yes, you can build a credit score even without taking a traditional loan. And this blog will explain how, in a simple and practical way. 

What Exactly Is a Credit Score & Why Does It Matter for Business Loans?  

Think of a credit score as your financial report card.  It’s just a number that shows how well you handle money and loans. 

In India, this score usually ranges from 300 to 900, which means the higher the score, the better. 

And that’s why lenders care about your credit score because a good score helps you get faster approval, lower interest rates, and a higher loan amount, while a low or zero score can delay approval, reduce the loan amount, or even lead to rejection. 

Ways to Build Credit Score Without Taking a Loan 

Taking a loan is not the only way to build a credit score and smart business owners can start building strong credit through credit cards, timely bill payments, and disciplined money habits even before applying for their first business loan. 

Let’s look at practical and legal methods that work in India. 

Use a Credit Card the Right Way 

A credit card is one of the easiest and safest ways to start building your credit score, especially if you don’t have any loan history. Every time you use it, the bank records your activity and shares it with credit bureaus like TransUnion CIBIL, Experian, Equifax, and CRIF High Mark. 

If you are applying for your first credit card, start with a basic entry-level card from your bank where you already have a savings or current account. If you don’t qualify, a secured credit card against a fixed deposit is a good and low-risk option to begin your credit journey. 

Paying your credit card bill on or before the due date shows that you borrow responsibly and repay on time. When you follow this habit consistently, banks begin to trust you more, and your credit score improves gradually. 

This is why experts suggest using only 30–40% of your credit limit. Lower usage shows financial control and discipline, while heavy usage can make you look overly dependent on credit. 

Example: 

• Your credit card limit is ₹50,000. 
• Safe usage is around ₹15,000–₹20,000. 
• You spend ₹18,000 on fuel, office items, and internet bills. 
• Before the due date, you pay ₹18,000 in full. 

What happens then? 

• No interest will be charged. 
• Your credit history becomes positive. 
• Your credit score slowly goes up. 

Pay Utility and Mobile Bills on Time

Many people ignore this, but late bill payments can quietly damage your financial profile. Paying postpaid mobile bills and electricity bills on time reflects financial discipline and responsible money management. While not every bill directly increases your credit score, missing or delaying these payments can still have a negative impact on it. 

Why this matters: 

If a bill goes unpaid for long, companies may report it or send it to collections and that affects your credit score. 

Example: 

You run a small office or shop: 

• Monthly electricity bill: ₹2,500 
• Postpaid mobile bill: ₹700 

So, if you pay all your regular bills before the due date every month, it reflects financial stability, responsibility, and clean money management. This consistent discipline plays a key role when you apply for a business later.

Buy Now, Pay Later (BNPL) – Use It Carefully

BNPL is basically like a mini loan. It lets you buy something immediately and pay later in monthly instalments, usually without any upfront payment. When you repay these instalments on time, it helps create a positive credit history. 

How BNPL helps your credit: 

• Some BNPL apps report your repayment behavior to credit bureaus (TransUnion CIBIL, Experian, Equifax, and CRIF High Mark). 
• Paying every instalment on time shows you are financially disciplined. 
• This can help start or improve your credit score. 

Example: 

You buy office headphones worth ₹3,000 using BNPL. 

• You select a 3-month no-cost repayment plan. 
• You pay ₹1,000 every month on time. 

This means lenders slowly start seeing you as someone who can manage small amounts of credit responsibly. With time, these good repayment habits add positive activity to your credit profile and build trust, all without you needing to take a big loan. 

Also remember: 

• Missing even one payment can reduce your credit score. 
• Using too many BNPL apps at the same time can make you look risky to lenders. 

Become an Authorized User on Someone Else’s Credit Card

If you are new to credit, this can be a helpful shortcut. A trusted family member or business partner can add you as an authorized user on their credit card, and you don’t need to apply separately for a new credit card. Their good payment history can help you start building your own credit profile. 

Example: 

If your spouse has a credit card limit of ₹1,00,000, pays all bills on time, and adds you as an authorized user, their good credit habits can positively reflect on your credit profile, even if you rarely use the card. 

So, choose someone responsible, as missed payments can affect your credit score too. This method is often used by first-time business owners before applying for loans.

Opening a Current Account & Keep It Active

A current account doesn’t directly increase your credit score, but for businesses, it is very important. Think of it as proof that your business is real and running properly. 

Why lenders care about your current account: 

• It shows money coming in and going out regularly. 
• It proves your business is active, not just on paper. 
• It helps lenders understand whether you can repay a loan or not. 

Example: 

Let’s say you run a small trading business. 

• Your customers pay you into your current account. 
• You use the same account to pay suppliers, rent, electricity, and other business expenses. 

After 6–12 months, your bank statements will show: 

• Regular income 
• Controlled expenses 
• Stable cash flow 

So, this means, when lenders see this, they trust your business more. Even if your credit history is new or limited, clean and active current account statements can improve your chances of getting a business loan. 

Avoid Common Mistakes That Damage Credit Score 

Building credit is a slow process, but damaging it won’t take time.  

There are few mistakes you can keep in mind to avoid any repercussions.  

Missing credit card due dates
If you forget to pay a ₹2,000 card bill, the bank charges a late fee and your credit score goes down.  

Paying only minimum amount
Let’s say, your total bill is ₹10,000 but you pay only ₹500 of Minimum Amount Due. The remaining amount keeps attracting interest, and your credit score will not improve. 

Applying for many loans/cards together
If you apply for 4–5 cards or loans in one month, banks may think you are under financial pressure and see you as risky. 

Ignoring old dues
Even a small unpaid amount like ₹1,200 from the past can create problems and stop your loan from getting approved later.  

Truth:
If you keep your record clean today, getting loans and credit in the future becomes much easier. 

How Long Does It Take to Build Credit Without Loans? 

This is not instant, and that is totally normal. 

Realistic timeline: 

• 3–6 months: Credit activity starts showing 
• 6–12 months: Score becomes stable 
• 12+ months: Strong enough for business loans 

Key takeaway: Don’t rush and be consistent. Even small, good habits, done every month can make a big difference. 

Why You Should Build Credit Before Taking a Business Loan 

Think of your credit score like the foundation of a building. If the foundation is strong, everything else becomes easier. 

When your credit score is good, lenders trust you more. That means: 

• Higher chances of loan approval – fewer rejections 
• Better loan terms – lower interest and flexible repayment 
• Faster processing – less waiting and fewer follow-ups 
• Less documentation stress – fewer questions and explanations 

So, if you are planning to take a business loan in the next 6 – 12 months, the best time to start building your credit is now, even if you are not taking any loan today. 

Final Thoughts: Is It Possible? 

Yes, absolutely. 

You can build a credit score without taking a loan and it’s actually a smart move. 

Only you have to- 

• Use your credit cards carefully. 
• Paying bills on time 
• Managing your money consistently 
• Avoiding common mistakes 

Indian business owners can create a strong and clean credit profile before applying for their first business loan. 

At TallyCapital, we believe in supporting businesses at every stage, whether you’re preparing today or ready for funding tomorrow.

FAQs

Can I build a credit score without taking a loan?
Yes. Credit cards, BNPL payments, and timely bill payments can help you build a credit score even without loans.

How long does it take to build credit score without loans?
Typically, 3–6 months for activity to appear and 6–12 months for a stable score.

Does paying electricity or mobile bills improve credit score?
Timely payments show financial discipline. Missed payments can hurt your score if reported or sent to collections.

Is BNPL safe for credit score building?
Yes, if used carefully. Timely repayments help, but missed payments or overuse can reduce your score.

What is a good credit score for business loans in India?
A score above 700 is generally considered good for business loan eligibility.

Every great business begins with a powerful idea. But turning that idea into a reality requires capital. For aspiring entrepreneurs in India, the journey from concept to company often starts with a critical question: “Where can I get the money to start my business?” Securing initial funding can feel like a major hurdle, but the landscape of startup funding options is more diverse and accessible than ever before. 

Navigating the world of finance doesn’t have to be intimidating. Understanding your choices is the first step toward making a smart decision for your new venture. This guide will walk you through the best startup funding options available in India, helping you find the right path to launch your dream. 

Exploring Your Startup Funding Options 

The right funding source depends on your business model, your stage of development, and your long-term goals. Some entrepreneurs prefer to maintain full ownership, while others are willing to trade equity for capital and mentorship. Let’s break down the most common avenues for financing your startup.

Traditional Bank Loans

For decades, banks have been the go-to source for business capital. They offer various types of loans, including term loans for large, one-time expenses and working capital loans to manage day-to-day operations. 

• How it works: You submit a detailed business plan, financial projections, and collateral to a bank. The bank assesses your creditworthiness and the viability of your business idea before approving the loan. 

• Benefits: Banks offer structured repayment schedules and allow you to retain full ownership of your company. The interest rates can be competitive if you have a strong credit history. 

• Challenges: The application process for business loans for startups in India can be long and demanding. Banks are often risk-averse and may require significant collateral or a proven track record, which most new startups don’t have.

Government Loan Schemes

The Indian government has launched several initiatives to promote entrepreneurship and support small businesses. These schemes are designed to provide financial assistance with favorable terms. 

• How it works: Programs like the Pradhan Mantri MUDRA Yojana (PMMY) and the Stand-Up India Scheme offer loans through various financial institutions. These schemes often have relaxed eligibility criteria and may not require collateral. 

• Benefits: Government schemes provide access to capital for those who might not qualify for traditional bank loans. They often come with lower interest rates and government-backed credit guarantees. 

• Challenges: The application process can still involve significant paperwork and bureaucratic steps. Awareness and accessibility of these schemes can also vary by region.

Venture Capital (VC) Funding

Venture capital firms are investment companies that provide capital to startups with high growth potential in exchange for an equity stake. They invest other people’s money from a fund and are looking for a significant return on their investment. 

• How it works: You pitch your business to a VC firm. If they are interested, they conduct extensive due diligence before investing. VCs typically invest larger sums of money in businesses that are ready to scale rapidly. 

• Benefits: Beyond just capital, VCs provide invaluable mentorship, industry connections, and strategic guidance to help you grow your business. 

• Challenges: Securing VC funding is highly competitive. Founders must give up a portion of their company ownership and control. VCs also expect aggressive growth and a clear exit strategy, like an IPO or acquisition.

Angel Investors

Angel investors are wealthy individuals who invest their own money in startups in exchange for equity. They often invest in industries they know well and can act as mentors. 

• How it works: Similar to VCs, you need to pitch your idea to angel investors or angel networks. They typically invest smaller amounts than VCs and often focus on very early-stage companies. 

• Benefits: Angel investors can be more flexible than VCs and often make decisions faster. They bring personal expertise and can open doors to valuable contacts. 

• Challenges: Finding the right angel investor who aligns with your vision can be difficult. Like with VCs, you will be diluting your ownership stake in the company. 

A Smarter Approach: TallyCapital Business Loans 

While traditional funding routes have their place, the modern business landscape demands faster, more flexible financing. Startups need capital quickly to seize opportunities and stay ahead. This is where modern startup financing solutions like TallyCapital come in. 

TallyCapital, from the house of TallyPrime, is designed to address the unique challenges faced by new businesses in India. It offers a simple, smart, and superior way to secure the funds you need without the complexities of traditional lending. 

How TallyCapital Simplifies Business Funding 

1. Fast and Easy Application:
   For a startup, time is the most valuable resource. TallyCapital streamlines the loan application process, moving away from piles of paperwork and long waiting periods. The digital-first approach ensures you can apply for funding quickly and get a decision faster, helping you act on business opportunities without delay. 
2. Flexible Financing Solutions:
   Every startup is different. TallyCapital understands that a one-size-fits-all approach doesn’t work. It provides access to flexible credit options tailored to your specific needs, whether you require funds for inventory, marketing, or hiring your first employees. 
3. Built on Trust and Transparency:
   Coming from Tally, a name trusted by millions of businesses, TallyCapital operates with transparency. There are no hidden fees or complicated terms. You get a clear understanding of your loan, helping you plan your finances with confidence. 
4. Designed for the Modern Entrepreneur:
   TallyCapital startup loans are built for the digital age. The solution leverages technology to assess your business and provide credit, making it one of the most accessible startup funding options for ambitious entrepreneurs across India.

Choosing the Right Path for Your Business 

Deciding where to get a loan to start your business is one of the most important decisions you’ll make. 

• If you have a strong business plan and collateral, a bank loan might be a good fit. 

• If your business aligns with social or economic development goals, explore government schemes. 

• If you have a high-growth, scalable idea and are ready to give up equity for expertise, VCs or angel investors are your best bet. 

• If you need fast, flexible, and hassle-free capital to get your business off the ground, TallyCapital offers a powerful solution. 

Ultimately, the best startup financing solution is one that aligns with your vision and empowers you to build your business on your own terms. By exploring all available avenues and leveraging modern tools, you can secure the capital you need to turn your entrepreneurial dream into a thriving success story. 

FAQs

Can I get a loan to start a business without collateral in India?
Yes, several government schemes and digital lenders offer startup loans without collateral, especially for MSMEs and first-time entrepreneurs.

Which is the best funding option for a new startup?
It depends on your needs. Bank loans suit structured businesses, VCs and angels suit high-growth startups, while digital platforms offer faster access to capital.

Are startup loans better than equity funding?
Startup loans allow founders to retain ownership, while equity funding provides mentorship but dilutes control. The right choice depends on growth goals.

How quickly can I get funding for my startup?
Traditional loans may take weeks, while modern digital lending solutions can offer approvals much faster with minimal paperwork.

What documents are required for a startup loan?
Typically, identity proof, business details, bank statements, and basic financial information are required. Requirements vary by lender.

Running a small business in India is not easy. Whether you own a shop, a manufacturing unit, a service company, or a startup, one thing remains common for all entrepreneurs – the need for timely finance. The right small business loan can help your business grow smoothly, while the wrong loan can create unnecessary financial pressure. 

As a business owner, you may need funds to manage daily expenses, buy new machinery, expand to a new location, or handle sudden cash shortages. Today, there are many loan options available for MSMEs in India, offered by banks, NBFCs, and digital lenders. While choices are good, too many options can also be confusing. 

This detailed guide explains different types of small business loans, how they work, and how Indian business owners can choose the best option based on their needs. 

Why Choosing the Right Small Business Loan Is Important 

Not all business loans are the same. Each loan type is created for a specific purpose. Some loans are suitable for long-term growth, while others are meant to solve short-term cash flow problems. 

Before applying for any loan, you should clearly understand: 

• Your business goal 
• Your monthly cash flow 
• How quickly do you need the money 
• How you plan to use the funds 

Choosing the wrong loan can increase interest costs, disturb cash flow, and add stress to your business. Choosing the right loan, on the other hand, can support steady growth and financial stability.

Type of Small Business Loans

Term Loans: Ideal for Long-Term Business Growth

A term loan is one of the most popular and traditional forms of business financing in India. Under this option, you receive a lump sum amount and repay it over a fixed period with interest. 

How Term Loans Work 

Once your loan is approved, the full amount is credited to your account. You repay it in monthly EMIs over a fixed tenure, which may range from 1 year to 5 years or more. Interest rates depend on your credit score, business turnover, and financial history. 

Best Uses of Term Loans 

• Expanding your business 
• Buying commercial property 
• Purchasing machinery or equipment 
• Opening a new branch 

Pros 

• Fixed and predictable EMIs 
• Suitable for large investments 
• Generally lower interest rates than short-term loans 

Cons 

• Approval process may take time 
• Requires good financial records and credit history 

If your aim is long-term growth and stability, a term loan can be a reliable option.

Working Capital Loans: Managing Daily Business Expenses

Working capital loans are designed to help businesses manage day-to-day operational expenses. These loans are very useful for Indian MSMEs that face seasonal demand or delayed customer payments. 

How Working Capital Loans Work 

These loans are usually short-term. The funds are disbursed quickly and are meant to support regular business operations rather than asset purchases. 

Best Uses of Working Capital Loans 

• Paying salaries and wages 
• Rent, electricity, and utility bills 
• Buying inventory or raw materials 
• Marketing and advertising expenses 

Pros 

• Quick access to funds 
• Helps manage cash flow gaps 
• Short commitment period 

Cons 

• Higher interest rates 
• Short repayment tenure 

Working capital loans are ideal if your business income fluctuates or if you need funds to keep operations running smoothly.

Business Line of Credit: Flexible Funding Option

A business line of credit offers maximum flexibility. Instead of receiving the entire amount at once, you get access to a credit limit and withdraw money only when required. 

How a Business Line of Credit Works 

You are approved for a fixed limit. You can withdraw any amount within that limit and pay interest only on the amount used. Once you repay, the limit becomes available again. 

Best Uses of Business Line of Credit 

• Handling unexpected expenses 
• Emergency repairs 
• Short-term cash flow needs 

Pros 

• Very flexible 
• Interest charged only on used amount 
• Funds can be reused 

Cons 

• Interest rates may vary 
• Requires disciplined financial management 

For businesses with uncertain or irregular expenses, a line of credit acts like a financial safety net. 

Equipment Financing: Buy Machinery Without Cash Stress

Equipment financing is a loan taken specifically to purchase business-related equipment. In most cases, the equipment itself is used as collateral. 

How Equipment Financing Works 

Because the lender has security in the form of equipment, approval is often faster and interest rates are lower compared to unsecured loans. 

Best Uses of Equipment Financing 

• Manufacturing machinery 
• Construction tools 
• Office computers and technology 
• Commercial vehicles 

Pros 

• Lower interest rates 
• Does not disturb working capital 
• Ownership of equipment 

Cons 

• Can be used only for equipment purchase 
• Risk of asset seizure if EMIs are missed 

This option is suitable when you want to upgrade assets without affecting daily business cash flow. 

Invoice Financing: Unlocking Money Stuck in Unpaid Bills

Many Indian businesses, especially B2B companies, face delayed payments from customers. Invoice financing helps you access funds against unpaid invoices. 

How Invoice Financing Works 

You receive a percentage of the invoice value upfront. Once the customer pays the invoice, the remaining amount is released after deducting fees. 

Best Uses of Invoice Financing 

• Improving cash flow 
• Paying suppliers 
• Managing delayed client payments 

Pros 

• Quick access to funds 
• No need for traditional collateral 
• Credit scores are less important 

Cons 

• Higher service fees 
• Depends on customer payment behavior 

Invoice financing is very useful for businesses dealing with large clients and long payment cycles. 

How to Choose the Right Small Business Loan 

Before selecting a loan, ask yourself these important questions: 

1. Why do I need the loan? Growth, daily operations, or emergency needs?
2. How fast do I need the funds? Some loans are approved faster than others.
3. Can I comfortably repay the loan? EMI should match your cash flow.
4. Do I need flexibility or fixed structure? Lines of credit offer flexibility, term loans offer stability. 

Choosing a loan that matches your business purpose is the key to healthy financial planning. 

How TallyCapital Helps You Choose the Right Loan 

At TallyCapital, we understand that every business is different. There is no one-size-fits-all solution when it comes to financing. Our team carefully evaluates your business goals, cash flow, and future plans before suggesting a loan option. 

We will help you. 

• Select the most suitable loan type 
• Understand interest rates and repayment terms 
• Avoid unnecessary financial burden 

Our aim is simple – to make finance work for your business growth, not against it. 

 Final Thoughts 

Understanding different types of small business loans gives you the power to make smart financial decisions. Whether you want to expand your business, manage daily expenses, or handle delayed payments, the right loan can be a strong support system. 

When chosen wisely and with the right guidance, business loans become a growth tool, not a financial obstacle. With proper planning and expert advice, Indian entrepreneurs can confidently take the next step in their business journey.

FAQs

Q1. What are the most common types of small business loans in India?
Term loans, working capital loans, business lines of credit, equipment financing, and invoice financing are the most common options.

Q2. Which loan is best for managing daily business expenses?
Working capital loans are best for handling salaries, rent, inventory, and other operational expenses.

Q3. Are small business loans available without collateral?
Yes, many NBFCs and digital lenders offer unsecured MSME loans based on cash flow and credit history.

Q4. How do I choose the right loan for my business?
Consider your purpose, cash flow, urgency, repayment capacity, and whether you need flexibility or fixed EMIs.

Q5. Can startups apply for small business loans in India?
Yes, startups can apply, though eligibility depends on business vintage, turnover, and financial records.

Managing your business finances involves tracking every rupee that comes in and goes out. When you take a loan to fund your operations or expansion, you might wonder how the repayments fit into your account. A common question among business owners is: Is loan repayment a business expense? This is a crucial question, as the answer directly impacts your taxable income. Let’s explore the details of loan repayments and their tax implications for Indian businesses. 

The short answer is nuanced. While the entire loan repayment amount is not considered a business expense, a significant part of it is. Understanding this distinction is key to accurate financial reporting and maximizing your tax benefits. 

Understanding Loan Repayment Components 

Loan repayment is typically made through Equated Monthly Installments (EMIs). Each EMI has two main components: 

1. Principal Repayment: This is the portion of the payment that goes towards reducing the original loan amount you borrowed. 
2. Interest Payment: This is the cost of borrowing the money paid to the lender for their service. 

For tax purposes, Indian tax laws treat these two components very differently. 

Which Part of a Loan Repayment is a Business Expense? 

According to the Income Tax Act, only the interest paid on a business loan is considered a deductible business expenditure. You can claim this interest amount as an expense in your profit and loss statement. This reduces your net profit and, consequently, your overall tax liability. 

The principal repayment, on the other hand, is not treated as a business expense. It is considered a capital expenditure because it reduces liability on your balance sheet. Since the initial loan amount, you received was not taxed as income; its repayment cannot be claimed as an expense. 

Think of it this way: the loan principal is a liability you are paying off, not an operational cost of running your business. The interest, however, is the cost incurred for using the funds, making it a legitimate operational expense. 

Maximizing Your Business Loan Tax Benefits 

To take full advantage of the tax benefits on a business loan, meticulous record-keeping is essential. You need to clearly separate the interest and principal components of your repayments throughout the financial year. 

Here’s how you can claim the deduction: 

• Proper Documentation: Keep all loan agreements and statements from your lender. These documents will clearly show the breakdown of your EMI payments into principal and interest. 

• Accurate Accounting: When recording loan repayments in your books, put the interest portion to an “Interest Expense” account and the principal portion to the “Loan Liability” account. 

• Claiming in ITR: While filing your Income Tax Return (ITR), the total interest paid during the financial year can be claimed as a deduction under “Business Expenses.” 

This simple practice ensures you are compliant with tax laws and are not overpaying your taxes. The savings can be significant, freeing up capital for other critical business needs. 

Streamlining Your Business Financing with TallyCapital 

Securing and managing business finance can be complex. The application process can be lengthy, and tracking repayments requires careful attention to detail. This is where a modern, simplified financing solution can make a huge difference. 

TallyCapital, a financing solution from the house of TallyPrime, is designed to make financing simpler, smarter, and superior for businesses like yours. Understanding the challenges business owners face, TallyCapital offers a seamless way to access funds and manage them efficiently. 

How does TallyCapital simplify the process? 

• Easy Access to Funds: TallyCapital provides a complete digital application process, enabling you to secure the capital you need without unnecessary hurdles. 

• Flexible Solutions: It offers financing options tailored to your business needs, whether you need working capital, funds for expansion, or money to purchase new equipment. 

The Bottom Line 

So, is loan repayment a business expense? Only the interest part is. The principal repayment is not. By understanding this rule, you can correctly manage your books, optimize your tax strategy, and improve your company’s financial health. 

For businesses looking to grow, leveraging business loans is a powerful strategy. And with TallyCapital, accessing and managing that finance becomes a much smoother journey. You can focus more on running your business, confident that your financial management is built on a solid and smart foundation. 

Frequently Asked Questions (FAQs) 

Q1: What part of a business loan repayment is tax-deductible in India?
In India, only the interest portion of your business loan repayment is tax-deductible. You can claim it as a business expense under Section 37(1) of the Income Tax Act. The principal amount you repay is not deductible. 

Q2: Is the entire EMI on a business loan a deductible expense?
No, the entire EMI is not a deductible expense. The EMI consists of both principal and interest. Only the interest component can be claimed as an expense to reduce your taxable income. 

Q3: How do I prove the interest paid on my business loan for tax purposes?
You can prove the interest paid by using the loan statements provided by your lender. These statements provide a clear amortization schedule, breaking each EMI into its principal and interest components. Keep these documents for your records and for filing your tax returns. 

Q4: Can I claim tax benefits on a personal loan used for business purposes?
Yes, if you can prove that the funds from a personal loan were used exclusively for business purposes, you can claim the interest paid on that loan as a business expense. It is crucial to maintain clear records demonstrating how the funds were utilized in the business. 

Q5: How does TallyCapital support businesses?
TallyCapital provides simple, smart, and superior financing solutions for businesses. It simplifies the process of getting business loans by offering an easy application process and flexible credit options. 

Many business owners use credit cards or short-term credit to manage everyday expenses. It helps maintain smooth cash flow, especially during busy or slow seasons. But one question often comes up.
Does paying only the minimum amount affect your credit score 

Your credit score is one of the most important indicators of your financial health. It can influence your loan eligibility and the interest rates offered by lenders. In this blog, we will explain how minimum payments work, whether they impact your score and how you can maintain a strong credit profile. This guide is simple, practical and designed to help you make better financial decisions for your business. 

Understanding the Minimum Payment Concept 

When you receive your credit card bill, the total outstanding amount may seem high at times. To give you flexibility, banks allow a minimum amount to be paid. This is usually around five percent of your total bill. Paying only this amount keeps your account active and avoids late payment penalties. 

It may look convenient, but it comes with important consequences. 

Does Minimum Payment Affect Your Credit Score 

The short answer is yes and no. Paying the minimum amount does not directly reduce your credit score. As long as you pay this amount on time, your bank will not report your account as overdue. 

However, paying only the minimum can create situations that harm your score in the long run. 

Here is how it really affects your credit health.

Higher credit utilization

When you pay only the minimum, your outstanding balance remains high. This increases your credit utilization ratio.

Credit utilization means how much credit you are using compared to your total limit. Experts suggest keeping it below 30 percent. A high utilization ratio signals financial stress and can reduce your credit score.

Slow reduction of outstanding amount

Minimum payments barely reduce your actual balance. This means your debt remains high for a long time. High outstanding amounts can negatively impact your score.

Higher interest charges

Banks charge interest on the unpaid amount. As interest builds up every month, your balance may increase instead of decreasing. This can lead to delayed payments later which will definitely affect your credit score.

Increased chance of missed payments

When your balance becomes too high, it becomes harder to pay future bills.  A single missed or late payment may hurt your credit score significantly.

Long term financial stress

Continually paying only minimum amounts keeps your card in a revolving debt cycle. This can affect your overall ability to borrow, including business loans. 

So, while paying the minimum amount protects you from late payment fees, it does not protect your credit score in the long term. 

Do Late Payments Affect Credit Score 

Yes. Late payments have one of the strongest impacts on your credit score. If you delay your payment by more than 30 days, it is usually reported to credit bureaus. This record stays on your credit report for many months. 

A single late payment can affect your ability to get: 

• Business loans 
• Credit card limit increases 
• Better interest rates 
• Working capital loans 

Late payments also create trust issues for lenders who are evaluating your repayment discipline. 

Minimum Payment vs Full Payment 

Here is a simple table to help you understand the difference. 

How Minimum Payments Impact Business Owners 

For many small and medium businesses, credit cards act as a financial cushion. When sales are slow, paying only the minimum feels comfortable. But long-term reliance on minimum payments can lead to: 

• Higher borrowing costs 
• Difficulty taking new business loans 
• Lower credit score 
• Reduced lender confidence 
• Cash flow pressure due to rising interest 

If you are planning to apply for a business loan soon, it is always better to maintain a low outstanding balance. 

How to Improve My Credit Score 

Improving your score is not complicated. It only requires consistency. Here are simple and effective steps you can follow.

Always pay EMIs and card bills on time – Payment history has the highest impact on your credit score.

Try to pay more than the minimum amount – Even paying half or two thirds of your total bill is better than paying only the minimum.

Maintain low credit utilization – Keep your usage below 30 percent of your total limit. This is one of the easiest ways to improve your credit score.

Avoid applying for too many loans together – Each loan application creates a hard inquiry. Too many inquiries can reduce your score.

Check your credit report regularly – Sometimes there are errors in your report such as old accounts shown as active or incorrect late payments. Correcting these can improve your score instantly.

Keep old credit accounts active – A longer credit history looks positive.

Maintain a mix of secured and unsecured loans – A balanced credit mix shows that you can handle different types of credit responsibly. 

How Long Does It Take to Improve Your Credit Score 

If you consistently follow these steps, you may start seeing improvements within three to six months.
If you have serious issues like defaults, the recovery may take longer. But lenders always appreciate steady repayment behavior. 

How TallyCapital Helps You to Build Better Credit Health 

TallyCapital is created to bring simple, smart and superior financing to business owners using TallyPrime. It helps you manage your credit health better by giving you: 

• Instant credit score checks with insights 
• Access to business loans with the best interest rates 
• Personalized offers from trusted lending partners 
• Quick approval with minimal documentation 
• A completely secure and transparent process 

You can access TallyCapital directly inside TallyPrime and check your loan eligibility in minutes. 

Final Thoughts 

Paying only the minimum amount on your credit card does not damage your credit score immediately. But it creates situations that can harm your score over time, such as high utilization, growing interest and increased chances of late payments. 

If you want a strong credit score and better loan opportunities, try to pay more than the minimum amount. Focus on timely payments and smart credit usage. 

With tools like TallyCapital, you can easily track your credit score, understand your credit health and access the right business loan at the right time.

FAQs

Q1. Does paying only the minimum amount affect credit score?

Paying the minimum amount does not immediately reduce your score, but it increases credit utilization and interest, both of which can harm your score over time.

Q2. What happens if I keep paying only the minimum amount?

Your outstanding balance stays high, interest continues to grow, and your utilization percentage may increase, leading to a gradual drop in your credit score.

Q3. Does minimum payment count as an on-time payment?

Yes. Minimum payment counts as on-time and prevents late fees. But the remaining balance still attracts interest.

Q4. How does credit utilization impact my credit score?

High credit utilization (above 30%) is viewed negatively by lenders and can reduce your score significantly.

Q5. Do late payments affect credit score?

Yes. Late payments have one of the strongest negative impacts and can stay on your report for several months.

Q6. Can paying more than the minimum improve my credit score?

Absolutely. Paying in full or paying more than the minimum, keeps your balance low and helps improve your score faster.

Many business owners feel nervous about checking their credit score because they assume it will lower their score. This idea is very common and often stops people from understanding their credit health or preparing for a business loan. 

So does your credit score go down if you check it? The simple answer is no. 

Checking your own credit score does not reduce your credit score in any way. You can check it as many times as you want without any negative impact. 

In this guide, we will explain why your score stays safe, how credit checks work, and how you can check your score easily using Tally Capital. 

Why People Think Checking Their Score Reduces It 

Most people confuse two different types of credit checks. One is harmless and the other can temporarily affect your score. Because of this confusion, many believe every check is risky. 

To understand this better, you need to know the two types of credit enquiries. 

Types of Credit Enquiries 

Credit enquiries are of two types. Each one has a different impact on your credit score. 

Soft enquiry 

A soft enquiry happens when you check your own score. It also happens when a lender checks your score for pre-approved offers without you applying for a loan.
A soft enquiry does not reduce your credit score. 

Hard enquiry 

A hard enquiry happens when you apply for a loan or credit card. The lender checks your report as part of the approval process. A hard inquiry can reduce your score slightly. 

This is the main reason people get confused. They assume the soft enquiry used for checking their personal score will have the same effect as a hard enquiry used when applying for credit. 

So checking your score through Tally Capital or from any credit bureau website does not harm your score. 

How Does a Hard Enquiry Affect the Score 

A hard enquiry may bring down your score a little because it shows you are actively looking for credit. Lenders do not want too many applications within a short period because it may indicate financial stress. 

However, the drop is usually small and temporary. If you pay your EMIs on time and maintain healthy credit usage, your score recovers quickly.

Why Checking Your Score Regularly Is Actually Good 

Instead of reducing your score, checking your credit score regularly can actually help you in many ways. Here is why it is useful. 

You get early warning signs 

If there is any issue such as a late payment or unexpected fall in your score, you can fix it before applying for a loan. 

You can track your improvement 

Regular checks show whether your habits are improving your score or pulling it down. 

You can spot errors 

Sometimes banks may report wrong information by mistake. If you check your score regularly, you can quickly report errors and correct them. 

You can prepare before applying for a loan 

If you know your score is low, you can improve it first. This increases your chances of loan approval. 

You stay financially aware 

Knowing your score gives you a clear picture of your financial discipline. 

How Does Credit Score Work When You Apply for a Loan 

When you apply for a business loan, lenders look at many factors, and your credit score is one of the first checks. Your repayment history, credit usage, past behavior and stability are all reflected in your credit score. 

A good score helps you: 

• Get loan approval faster 
• Receive better interest rates 
• Qualify for a higher loan amount 
• Experience a smoother application process 

A low score may lead to loan rejection or strict repayment terms. That is why knowing your score early is always beneficial. 

How to Check Credit Score Safely Without Any Impact 

There are many ways to check your score, but the safest and easiest method for business owners is through TallyCapital. 

You can check your credit score directly inside your TallyPrime platform with just a few details. It is fast, secure and has no impact on your score because it is a soft inquiry. 

You can also check your score on the TallyCapital website in a few simple steps: 

• Enter basic details like name, mobile number, email and PAN 
• Verify your mobile number 
• Get your complete credit score and insights instantly 

Since this is a self-check, it does not lower your credit score. 

What Does Not Affect Your Credit Score When You Check It 

Here is a quick list of what will not lower your credit score. 

• Checking your own credit score 
• Checking your credit score multiple times 
• Receiving pre-approved loan offers 
• Getting your score from credit bureau websites 
• Getting your score from Tally Capital 
• Viewing your loan eligibility 

These are all soft enquiries and have no negative effect. 

What Actually Affects Your Credit Score 

To avoid confusion, here are the things that actually lower your score. 

• Missing EMIs 
• Delayed payments 
• Using too much credit 
• Applying for many loans at once 
• Defaulting or settling loans 
• Having high outstanding balances Frequent hard enquiries 

Understanding this difference helps you use credit more wisely. 

Why TallyCapital Makes Checking Your Score Easier 

TallyCapital is designed for TallyPrime users who want fast financing and clear insights. It offers a secure way to check your credit score without harming it. 

You also get: 

• Easy credit score insights 
• Business loan eligibility check 
• Best loan offers from trusted lending partners 
• Smooth application with minimal documentation
• Fast approval and direct fund transfer 

This makes loan planning simple for small and medium businesses. 

Final Thoughts 

Checking your credit score does not reduce it. This is one of the biggest myths in the world of finance. A self-check is always a soft enquiry and has absolutely zero impact on your score. 

In fact, checking your score regularly is a smart habit. It helps you stay informed, catch errors early and prepare for future business loans with confidence. 

With TallyCapital, you can check your credit score safely and quickly right inside TallyPrime. It is simple, accurate and designed to help your business borrow better.

Every business needs funds at some point. You may want to buy more stock, expand operations, manage cash flow or grab a new opportunity. Whatever the reason, your credit score plays an important role when you apply for a loan.

But what is a credit score? How credit score works? Why do lenders check it before offering a business loan? And how can you know your credit score in a simple way.

At TallyCapital, we simplify complex credit concepts so business owners can clearly understand what lenders look for and how to improve their chances of loan approval.

What is a Credit Score

A credit score is a three-digit number that indicates how trustworthy you are as a borrower. It tells the lender how likely you are to repay a loan on time. Think of it as your financial report card.

In India, the score usually ranges from 300 to 900.

• A higher score shows strong credit behaviour
• A lower score shows a higher risk

If you want easy loan approval, a smooth borrowing experience, and better interest rates, keeping a good credit score helps.

Who Calculates Your Credit Score

Your credit score is created by licensed credit bureaus. Banks and lenders share your credit information with these bureaus, and they calculate your score based on your repayment behaviour.

The four major credit bureaus in India are:

• CRIF High Mark
• TransUnion CIBIL
• Experian
• Equifax
  

Each bureau has its own method of calculation but they all look at similar data such as how you repay loans, how much credit you use and how frequently you apply for new credit. Lenders pull your score from one or more of these bureaus whenever you apply for a loan.

How Does Credit Score Work

Credit scoring is essentially a statistical, risk-evaluation exercise. Lenders or credit bureaus assess a borrower’s credit history using several key factors and each factor reflects a different aspect of borrowing behaviour. Then, using a proprietary algorithm or model, they combine the factors to produce a three-digit score (in India usually between 300 and 900). 

Here’s a breakdown of these factors and how they influence your credit score:

Repayment history

This is the most important factor. If you pay all your EMIs and credit card bills on time, your score stays healthy. If you delay or miss payments, your score drops.

Credit usage

This shows how much of your available credit you use. For example, if you have a credit card limit of ₹1,00,000 and you use around ₹80,000 every month, your utilization is 80 percent which is considered high. Experts suggest using less than 30 percent of your credit limit.

Length of credit

If you have been using credit for many years and have a stable record, it increases your score. A long and clean history shows reliability.

Type of credit

A healthy mix of secured loans such as business loans or auto loans and unsecured credit such as credit cards shows responsible borrowing behavior.

Number of loan enquiries

Every time you apply for a loan, lenders check your credit report. Too many such checks in a short time may show that you are credit hungry which can reduce your score.

Factors That Influence the Score at a Glance

Here is a quick table to make it easier to understand.

Why Credit Score Matters for Business Loans

When you apply for a business loan, lenders want to understand one thing.
Are you a safe borrower?

Your credit score helps them decide that. Here is why it is important.

• Banks approve loans faster when your score is good
• You get better interest rates
• You can qualify for a larger loan amount
• Lenders trust you more
• Your application process becomes smoother

Even if your business has good revenue, a low score may create hurdles in loan approval.

How to Know Credit Score Easily

There are many ways to check your score but the simplest option for business owners is through TallyCapital.

You can check your credit score directly inside the TallyPrime platform and get clear insights about your credit health.

You can also check your score on the TallyCapital website by entering basic details like name, mobile number, email and PAN. This helps you understand where you stand before applying for a loan.

Other ways include checking through credit bureau websites, but TallyCapital makes the entire experience faster and easier.

What Can Reduce Your Credit Score

Even small mistakes can affect your score. Some common reasons are:

• Missing EMIs
• Delayed bill payments
• Paying only the minimum amount on credit cards
• Using almost your full credit limit every month
• Applying for too many loans
• Closing old accounts suddenly
• Defaulting or settling old loans

Understanding these habits can help you avoid score drops in the future.

How to Improve Your Credit Score

Improving a credit score is not difficult. It requires steady behaviour and regular checkups.

Here are simple steps you can start today.

• Pay all EMIs and credit card bills before the due date
• Keep your credit usage within thirty percent
• Avoid applying for many loans at the same time
• Check your credit report regularly for errors
• Do not close old credit accounts unless necessary
• Maintain a mix of secured and unsecured loans
• Use auto payment reminders to avoid missed EMIs

Most scores begin to improve within three to six months if you follow these habits.

Personal Score and Business Score

Many small business owners use the same financial identity for both personal and business purposes. Because of this, lenders often check both your personal credit score and your business credit score.

A business credit score is affected by:

• Age of the business
• Business registration details
• Revenue patterns
• Existing business loans
• Payments to suppliers and vendors
• Consistency of transactions
• Owner or partner credit history

Both scores matter for loan approval especially for MSME and small businesses.

TallyCapital Makes the Loan Journey Simpler

TallyCapital is built for TallyPrime users who want fast and trusted business financing. It brings simple, smart and superior lending inside your Tally software so you can access funds without jumping between multiple platforms.

Here is how it works in four easy steps.

Check eligibility

You get instant insights about your loan eligibility and credit strength.

Apply with a few clicks

A simple and smooth application process within your trusted TallyPrime with minimal paperwork.

Quick approval

Fast decisions from multiple trusted lending partners.

Funds transferred directly

The loan amount is sent straight to your business account.

TallyCapital does not look only at your credit score. It also considers your business data in TallyPrime, which helps lenders take a fair and complete decision. This makes it possible for even a business with a moderate score to receive suitable loan options.

Why Businesses Prefer TallyCapital

• Smart credit score insights
• Multiple lending partners for better offers
• Access from your trusted TallyPrime platform
• Safe and transparent loan process
• Faster approvals with minimal effort

This helps businesses grow without stress or delays.

Final Thoughts

Your credit score is an important part of your financial journey. It affects how easily you can get loans and how much you pay in interest. Understanding how credit score works and how to know your credit score gives you the power to make better financial decisions.

With TallyCapital, you can check your score, get insights and access loan offers all from one trusted place. This makes financing simpler, smarter and more supportive for your business.

FAQs on How Credit Score Work

Q1. How is credit score calculated for business owners?
A credit score is calculated using repayment history, credit usage, credit mix, length of credit history and loan enquiries.

Q2. What is a good credit score for getting a business loan?
A score of 700+ is ideal for fast approvals and better interest rates, but lenders may offer loans even with moderate scores depending on your business data.

Q3. Does checking my own credit score reduce it?
No. Checking your score through TallyCapital is a soft enquiry and does not impact your score.

Q4. How long does it take to improve a credit score?
Most business owners see improvement within 3–6 months with consistent repayment and controlled credit usage.

Q5. Can I get a business loan with a low credit score?
Yes, depending on lender policies. TallyCapital also evaluates business data in TallyPrime, giving a more complete picture.

Applying for a business loan can feel overwhelming, especially when you know that lenders will closely examine your company’s finances. But what exactly are they scrutinizing? The answer: a set of important financial ratios that tell them how healthy and stable your business is. 

These lending ratios serve as a financial report card for your business, showing banks how likely you are to repay their money on time. For MSME owners and small businesses, understanding these seven key ratios is crucial – not only for loan approval, but also for long-term business health. 

Why Do Banks Care About Lending Ratios?

Lending ratios help banks quickly evaluate the financial strength and stability of your business. These ratios reveal how well you manage debt, generate profits, and maintain enough liquidity to handle unexpected expenses. By checking these numbers, lenders can assess the likelihood that you’ll repay your loan on time and measure your overall eligibility for credit. Strong financial ratios indicate a healthy, dependable business, making it more likely for your loan application to be approved.

Let’s break down the seven most important lending ratios that banks check when you apply for a business loan.

Debt Service Coverage Ratio (DSCR)

This is one of the first numbers a bank will look at. The DSCR measures if your business generates enough cash to cover its current loan payments (and the new one you’re applying for). 

What it means: Do you have enough income to pay your debts as they come due? 

Formula:
DSCR = Net Operating Income / Total Debt Service 

• Net Operating Income: Revenue minus operating expenses (before taxes and interest) 

• Total Debt Service: The sum of all principal and interest payments you owe each year 

What to aim for:
A DSCR of 1.25 or higher shows you have a comfortable buffer. If it’s below 1.0, it signals a risk to the bank. 

Current Ratio

The current ratio tells lenders whether your business can pay off its short-term debts with its short-term assets. 

What it means: Can you cover your immediate bills and obligations? 

Formula:
Current Ratio = Current Assets / Current Liabilities 

• Current Assets: Cash, inventory, receivables (convertible to cash within a year) 

• Current Liabilities: Bills, short-term loans—anything due within a year 

What to aim for:
A current ratio between 1.5 and 2.0 is ideal. Below 1.0 may worry lenders that you can’t meet your obligations. 

Debt-to-Income Ratio (DTI)

Often used for individuals but relevant for small businesses, especially sole proprietorships. This measures how much of your income is already committed to paying debts. 

What it means: How stretched is your business with existing debt payments? 

Formula:
DTI Ratio = Total Monthly Debt Payments / Gross Monthly Income 

What to aim for:
Banks prefer a DTI below 43%. The lower, the better—it shows you have breathing room for a new loan. 

Debt-to-Equity Ratio

This ratio compares what your business owes to what it owns (your equity). It tells lenders about your financial leverage. 

What it means: Are you funding your business more with borrowed money or your own investment? 

Formula:
Debt-to-Equity Ratio = Total Liabilities / Shareholder’s Equity 

What to aim for:
Lower is typically better—high debt may signal risk, although what’s “high” can depend on your industry. 

Gross Profit Margin

Banks want to see that your company is efficient in its production or sales. 

What it means: How much money is left after covering the direct costs of goods sold? 

Formula:
Gross Profit Margin = (Revenue – Cost of Goods Sold) / Revenue 

What to aim for:
A higher margin means greater efficiency. Compare with others in your industry to set benchmarks. 

Net Profit Margin

This shows what percentage of revenue remains as actual profit after all expenses. 

What it means: How much does your business actually keep from what it earns? 

Formula:
Net Profit Margin = Net Income / Revenue 

What to aim for:
Consistent and healthy net profit margins show strong business management. 

Inventory Turnover Ratio

For retail, manufacturing, or trading businesses, this ratio tells banks how quickly you sell and replace your inventory. 

What it means: Is your stock moving—or sitting idle? 

Formula:
Inventory Turnover = Cost of Goods Sold / Average Inventory 

What to aim for:
A higher turnover rate means you’re efficiently turning stock into sales. Too low could suggest overstocking or slow-moving goods. 

How TallyCapital Supports Your Business Loan Journey 

Juggling all these ratios while running your business can feel like a lot. That’s where TallyCapital comes in. Our tools are designed to help MSMEs: 

• Quickly Check Loan Eligibility: See where you stand with lender requirements using your real business data via TallyPrime. 

• Easily Track Financial Ratios: TallyPrime lets you generate up-to-date reports, so you always know your important numbers. 

• Make Confident Loan Decisions: Armed with a strong understanding of these ratios, you can apply for loans with greater confidence and success. 

By paying attention to these seven key lending ratios, you’ll put your business in a stronger position, not just for loan approval, but for growth and sustainability. Regularly review these numbers and use TallyCapital’s supportive tools to guide your financial strategies. That way, the next time you approach a bank for funding, you’ll be more than ready. 

While lenders look at your entire business profile, these financial ratios provide a quick and powerful snapshot of your company’s health. By understanding and actively working to improve your DSCR, Current Ratio, DTI, and Profitability Ratios, you’re not just preparing for a loan application—you’re building a stronger, more resilient business. 

Don’t wait until you urgently need funds to start thinking about these numbers. Regularly monitoring your lending ratios will put you in a position of strength, ready to seize growth opportunities with the right financial backing. 

It always feels good to clear a loan or pay off your credit card, especially if you do it ahead of time. For any business owner, having less debt means less stress and more money for other important things. But you may have heard that closing a loan or credit card early could actually lower your credit score. Is that true? 

The answer is: it depends. Being debt-free is great for your finances, but the way your credit score is calculated means some steps, like shutting down a loan or credit card, can cause small changes you might not expect. 

Let’s break down how paying off and closing a loan or credit card early can affect your credit score, what you should watch out for, and easy ways to keep your credit score healthy as a business owner. 

What Goes into Your Credit Score? 

Your credit score is basically your financial report card, a number between 300 and 900 that tells lenders how trustworthy you are when it comes to handling debt. In India, this score is tracked by companies like CIBIL or CRIF. 

Here’s what matters most: 

1. Paying Your Bills on Time: If you pay your EMIs and credit card bills when they’re due, your score goes up. Missed or late payments can really hurt. 
2. How Much Credit You Use: If your credit card limit is ₹2,00,000 and you regularly use ₹50,000, you’re using 25%. Lenders like it when you keep this below about 30%. 
3. Your Credit History: The longer you’ve been using credit or loans, the better. 
4. Mix of Credit: Having a combination of loan types, like one business loan and a couple of credit cards, is seen as positive. 
5. Applying for New Credit: Every time you apply for a new loan or card, it gets recorded. Too many applications too quickly can make you look desperate for credit and may lower your score a little. 

Now, how does closing an account early affect these points? Let’s see. 

What Happens If You Close a Loan Early? 

Paying off a business loan, vehicle loan, or any other kind of term loan before time shows you’re managing your money well. Here’s what to expect: 

Why It’s Good: 

• You Save Interest: Less time paying EMIs means less interest overall. 
• Less Debt Makes You Look Stronger: The less you owe, the healthier you look to lenders if you need another loan in the future. 
• Better Cash Flow: No more monthly payments, so you can use that money elsewhere. 

Possible Downsides: 

• A Minor Impact on Your Credit Mix: If you only had one loan and now it’s gone, your mix of credit types gets smaller. This matters a little, but not much. 
• Shorter Account History: Paying off the loan closes the credit account, so the history eventually “ages off” your credit report. 

Bottom Line: For loans, clearing them early is almost always a smart move. The positives far outweigh any minor impact on your score. 

What Happens If You Close a Credit Card? 

Credit cards are a bit trickier. Closing a card can have a real effect on your credit score, not always for the better.

It Can Raise Your Credit Usage

When you close a card, you lose that card’s limit. So, the percentage of credit you’re using out of your total limit suddenly goes up. 

Example: 

Let’s say you have: 

• Card A: ₹1,00,000 limit, balance of ₹30,000
• Card B: ₹50,000 limit, balance of ₹0 

Your total limit is ₹1,50,000, but you only owe ₹30,000.
You’re using 20% of your available credit. 

If you close Card B, your new limit is ₹1,00,000. Now, you’re using 30% without spending anything extra. If you cross that 30% mark, your score can dip.

It Can Shorten Your Credit History

If your oldest card is closed, over time, your credit history will look “shorter” to lenders. Long, stable credit histories are a big help to your score. 

When Does It Make Sense to Close a Card? 

• If it has a high annual fee and you’re not getting any benefit from it 
• If you’re tempted to overspend and need fewer cards to stay disciplined 

When Should You Keep It? 

• If it’s your oldest account (helps keep your credit “age” long) 
• If it has a high limit that helps keep your usage percentage low (just use it sometimes for a small bill and pay it off) 

Bottom Line: Don’t rush to close a credit card unless you really need to. If you have to close one, pick a newer card or one with a low limit, not your oldest or largest. 

Tips for Keeping a Healthy Credit Score 

Here are some simple steps all business owners can follow to keep their credit scores looking good: 

1. Always Pay on Time: Set reminders, use auto-debit; whatever it takes. 
2. Use Only What You Need: Try not to use more than 30% of your total card limits. 
3. Keep Old Cards Open: Unless they’re costing you money, it’s good to keep your oldest cards active. 
4. Check Your Credit Report: Look at it once in a while to make sure there are no mistakes. 
5. Apply for Credit Only When Needed: Too many loan or card applications in a short time can lower your score. 

How TallyCapital Can Help You 

Managing your credit doesn’t have to be confusing or hard. TallyCapital offers useful, easy tools for business owners: 

• Free Credit Score Check: You can check your business credit score with TallyCapital, totally free, and it won’t affect your score. 
• Quick Business Loan Check: Want to know if you qualify for a business loan? TallyCapital can help you check your eligibility fast using your business data in TallyPrime and connect you to trusted lenders. 

By using these features, you can stay on top of your business finances and protect your credit health. 

Simple Takeaways 

• Closing a loan early is good for you and your business and barely affects your credit score. 

• Closing a credit card, especially your oldest or one with a high limit, can raise your credit usage and shorten your credit history, which could hurt your score. 

• The best plan? Pay on time, use credit carefully, check your score regularly, and keep old credit lines open unless there’s a good reason to close them. 

Good credit habits pay off. With a little planning and by using tools like TallyCapital, you can keep your credit score strong and your business ready for every new opportunity. 

Imagine this – you’ve been careful with your finances. Your loan EMIs are paid, your credit cards are in check; yet when you check your credit score, it’s gone down.

Confusing, right? 

You’re not alone. Many business owners notice this dip and wonder what went wrong. The truth is that a credit score decreases even when you’re managing things responsibly. Let’s understand why that happens, how it impacts your borrowing potential, and what you can do to fix it. 

Understanding What a Credit Score Really Tracks 

Your credit score is a three-digit summary of how lenders view your financial behavior. It’s calculated by credit bureaus like CIBIL, Experian, Equifax, and CRIF High Mark. 

Every month, your lender sends your repayment data to these bureaus. They consider five broad factors to calculate your score: 

A sudden change in any of these can bring your score down, even if you’re technically paying everything on time. 

Top Reasons Why Your Credit Score Decreases

Let’s break down the most common reasons why credit score decreases. 

You’re using too much of your available credit 

If your business credit card or overdraft usage regularly touches 80–90% of the limit, it signals high dependency on credit. 

ven if you pay on time, this high utilisation ratio can lower your score. 

Recommendation – Try to keep your total credit usage below 30% of your approved limit. 

You’ve closed an old loan or credit card 

This one surprises most business owners. 

When you close a long-standing loan or old credit card, your overall credit age shortens and your available limit drops. 

That can temporarily reduce your score because credit bureaus view longer credit histories as more reliable.

If the card has no annual fee and isn’t hurting your finances, keep it open. Old accounts strengthen your credit profile. 

You’ve applied for too many loans in a short span 

Each time you apply for a loan or business credit, the lender pulls out your report that results in a hard inquiry. Too many of these in a short period can bring your score down by 10 – 20 points. 

Recommendation – If you’re exploring loan options, keep a gap between them. Compare lenders first, then apply selectively, not all at once. 

A lender reduced your credit limit 

Sometimes your lender reduces your business card or overdraft limit (based on policy changes or inactivity). 

That automatically increases your utilisation percentage and can bring your score down — even though you did nothing wrong. 

Recommendation – You can request a limit restoration or maintain a lower balance to balance out the ratio. 

There’s an error or delay in data reporting 

Not all score drops are your fault. Sometimes, lenders delay reporting data, or the bureau reflects wrong information; an account may show as “active” when it’s already closed. 

If you’ve cleared a loan, but your report hasn’t been updated, your score might temporarily fall. 

Recommendation – Always check your credit report monthly and review the “Last Updated” date. If it’s older than 45 days, your data may not be current. 

You can raise a correction request directly with the bereau. As per CRIF High Mark, most verified disputes are resolved within 30 days. 

You’ve missed a small payment you didn’t notice 

Sometimes, the reason is as small as a missed credit card annual fee or overdue business card interest. Even a ₹500 unpaid amount can trigger a “late payment” flag, pulling your score down. 

Recommendation – Set auto-debit for all recurring payments to avoid small oversights. 

What a Drop Means for Your Business 

If your credit score decreases below 750, some lenders may: 

• Offer you loans at higher interest rates 

• Ask for additional security or co-applicants 

• Approve smaller amounts than requested 

For MSMEs, even a short-term dip can affect your ability to borrow quickly when opportunities arise, like stocking up before the festive season or expanding to a new city. 

How to Recover when Credit Score Decreases 

Here’s a plan you can follow: 

• Check your credit report every month. 

Use TallyCapital to download your credit report. 

• Lower your utilisation ratio. 

Try paying down high balances first. Even reducing usage from 80% to 30% can improve your score in the next update cycle. 

• Avoid multiple loan applications. 

Compare loan options before applying. With TallyCapital, you can explore pre-qualified offers without affecting your score. 

• Fix reporting errors. 

If your report shows incorrect data, raise a dispute immediately with the bureau and notify your lender. 

• Be patient. 

Scores recover steadily, not instantly. As long as your repayments are consistent, you’ll see improvements over the next 1-2 reporting cycles (roughly 60 days). 

The Bottom Line 

A drop in your credit score doesn’t always mean you’re doing something wrong; it often means the system is reflecting temporary changes or delayed updates. What matters is maintaining financial discipline and knowing how to respond. 

Keep your utilisation low, monitor your reports regularly, and keep a gap between your credit applications. 

If your MSME’s credit score has recently fallen and you’re unsure why – checking it through TallyCapital can help you understand your score better and prepare your business for the next growth phase. 

Because when you understand your credit health, you don’t just manage your score, you strengthen your business’s financial health. 

You’ve probably noticed your credit score doesn’t get updated very quickly, even when you pay off your dues on time. That’s completely normal. 

Credit scores take a little while to update because lenders, credit bureaus, and banks all work in cycles. If you’ve just repaid a business loan or cleared a credit card bill, it can take a few weeks before the changes to reflect in your credit score. 

Here’s a clear breakdown of how it works and what you can do to keep your credit report healthy. 

What actually happens behind the scenes 

Your credit score is calculated by agencies like CRIF High Mark, CIBIL, Experian India, and Equifax.

Every month, banks and NBFCs send your updated repayment data to these bureaus. This includes: 

• EMIs you paid or missed 
• Loans you opened or closed 
• Credit card balances 
• Any overdue payments 

Once the bureaus receive this information, they update your report and recalculate your score. 

So even if you cleared out a big loan last week, your lender might not send that information to the bureau immediately, which means your updated score could appear after 30–45 days. 

How often your credit score updates 

In most cases, your credit score updates once a month, after your lender reports new data. 

According to India Today, credit bureaus generally refresh credit records every 30–45 days, depending on when lenders share the data. 

Recently, the Reserve Bank of India has encouraged banks to move towards faster, even bi-weekly, reporting to improve transparency. But as of now, most MSME owners can expect their score to update roughly once a month. 

What changes when credit score updates 

Each time the bureaus receive new data, they re-check your: 

• Payment history – whether you’ve paid EMIs and bills on time 
• Credit utilisation ratio – how much of your available credit you’re using 
• Credit mix – balance between secured (loans) and unsecured (cards) credit 
• New applications – number of recent loan or credit enquiries 
• Account closures – loans or cards you’ve fully paid off 

Even one of these factors can change your score up or down. 

For example, if you reduce your credit card usage from 80% to 30% of your limit, your next update could show a noticeable improvement. 

Why the timing matters for you 

If you’re planning to apply for a business loan, the timing of your score update can make a real difference. 

Let’s say you’ve just cleared a small loan and you’re waiting for your score to change. If you apply for another loan before the bureau updates your data, lenders may still see your old score and offer you a smaller amount or a higher rate. 

Waiting a few weeks can improve your chances of approval and help you get better terms. 

As The Economic Times explains, it usually takes one or two reporting cycles for any change in credit behavior to reflect in your score. 

How you can make sure your updates reflect correctly 

Here are a few practical steps that help: 

1. Check your report monthly: You can get a free report from TallyCapital. Look for the “Last Updated” date to see when your lender last reported data. 
2. Keep proof of payments: Always save loan closure letters, NOCs, and bank statements. They’ll help if you need to raise a correction. 
3. Dispute errors quickly: If your score hasn’t updated after 45–60 days, file a dispute directly on the credit bureau’s website. They’ll coordinate with your lender to fix it. 
4. Avoid multiple loan applications: Every hard inquiry slightly reduces your score. 
5. Keep utilisation low: Try to use less than 30% of your credit limit across cards and overdraft accounts. 

The bottom line 

Your credit score doesn’t change every week and that’s okay. Updates usually happen once a month, based on when your lender reports new data. 

If you’ve recently made payments or closed a loan, give it a few weeks before checking your score again. Consistency, not quick fixes, is what improves it over time. 

And if you want to check your free credit score or explore business loans that match your financial health, you can do it directly through TallyCapital. 

We help MSMEs like yours get the right financing backed by transparent processes and zero guesswork about your credit readiness. 

Every business, whether small or large, needs timely access to capital to grow. 

There are times when your business may need extra funds, to buy inventory, expand operations, pay suppliers, or cover short-term cash flow gaps. 

A business loan provides financial flexibility. It allows you to manage working capital, invest in growth, and seize new opportunities – all without disturbing your existing reserves. 

For thousands of MSMEs across India, business loans have become a trusted source of financing. 

This guide explains what a business loan is, how it works, its different types, eligibility requirements, and how TallyCapital makes the entire process easier and faster. 

What is a Business Loan? 

A business loan is a type of financing that allows business owners to borrow money from a bank, NBFC, or digital lender to meet business-related expenses. 

The borrowed amount is repaid over time with interest, usually through monthly installments (EMIs). 

In simple terms, a business loan helps you manage both planned and unplanned financial needs such as: 

• Managing daily operations 

• Expanding to a new location 

• Purchasing new machinery 

• Covering supplier or vendor payments 

A well-structured business loan helps ensure your business continues to operate smoothly, even during cash flow fluctuations. 

How Does a Business Loan Work? 

The process of getting a business loan is straightforward. 

When you apply for a loan, the lender evaluates your financial profile, such as business turnover, credit score, and repayment capacity, to determine your eligibility. 

Here’s a step-by-step overview: 

1. Application: You apply for a loan through banks, NBFCs, lenders or any financing solution.
2. Evaluation: The lender assesses your credit profile, business data, and bank statements to estimate risk.
3. Approval: If you qualify, the lender offers a loan amount, tenure, and interest rate.
4. Disbursal: Once approved, the funds are transferred to your account.
5. Repayment: You repay the loan in EMIs over the agreed period. Repayments are usually made monthly through auto-debit or bank transfer. 

💡 TallyCapital simplifies this entire journey, from eligibility check to disbursal, using business data within TallyPrime. 

Why Businesses Avail Loans 

Business loans are not just for financial emergencies. They are a practical tool for growth and stability. 

Common reasons business owners avail loans include: 

A timely business loan can help maintain business continuity while supporting your long-term goals. 

Types of Business Loans in India 

Businesses have diverse financial needs from short-term liquidity to long-term expansion. Here are the major types of business loans available to Indian MSMEs:

Term Loan

A Term Loan is a fixed-sum loan repaid in regular EMIs over a set period. 

 It can be secured (backed by collateral) or unsecured (based on creditworthiness). 

Features: 

• Fixed loan amount and repayment tenure (1–5 years). 
• Lower interest rates for secured term loans. 
• Predictable repayment schedule. 

Ideal for: Business expansion, asset purchase, or modernizing infrastructure.

Working Capital Loan

A Working Capital Loan is designed to manage your business’s day-to-day expenses, especially when payments are delayed or sales are seasonal. 

Features: 

• Short-term loan (typically 6–12 months). 
• Quick approval and disbursal. 
• No collateral required for smaller amounts. 

Ideal for: Retailers, distributors, or service providers who need liquidity to manage operations.

Loan Against Property (LAP)

A Loan Against Property (LAP) is a secured loan where you pledge owned property sucha as residential, commercial, or industrial to access a higher loan amount. 

Features: 

• Collateral-based loan. 
• Loan amount up to 60–70% of property value. 
• Longer tenure (up to 10–15 years). 
• Lower interest rates. 

Ideal for: Large expansion, debt consolidation, or equipment investment.

CGTMSE Loan (Collateral-Free MSME Loan)

The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) scheme enables MSMEs to obtain collateral-free loans through banks and NBFCs. 

Features: 

• Government-backed guarantee to lenders. 
• No need to pledge property or assets. 
• Loan amount up to ₹2 crore. 
• Covers both term loans and working capital facilities. 

Ideal for: Micro and small businesses with limited assets or first-time borrowers.

Overdraft or Cash Credit Facility

An Overdraft (OD) or Cash Credit (CC) is a revolving credit line where businesses can withdraw funds as needed, up to a pre-approved limit. 

Features: 

• Interest charged only on the amount utilized. 
• Limit renewed annually. 
• Provides financial flexibility for cash flow gaps. 

Ideal for: Businesses with regular inflows and outflows such as traders or wholesalers.

Machinery or Equipment Loan

A Machinery Loan allows businesses to purchase or upgrade equipment without depleting cash reserves. 

Features: 

• Often secured by the machinery itself. 
• Tenure ranges between 1–5 years. 
• Fast disbursal for reputed manufacturers. 

Ideal for: Manufacturing, logistics, and production-based businesses. 

 Government-Backed MSME Loan Schemes

The Government of India provides several subsidized loan schemes for MSMEs: 

These schemes make business finance accessible and affordable for entrepreneurs who lack traditional collateral. 

Summary Table: Loan Types Overview 

Secured vs. Unsecured Business Loans 

Business loans are categorized as secured or unsecured based on whether collateral is required. 

Who Can Apply for a Business Loan 

You can apply for a business loan if you meet the following basic conditions: 

• You are a Proprietor, Partnership Firm, LLP, or Private Limited Company. 
• Your business has been operational for at least 1–2 years. 
• You have an annual turnover of ₹10 lakh or more. 
• You maintain a credit score of 750+. 
• Your business has regular transactions and filed GST/ITR returns. 

Even if you’re a small enterprise, maintaining good financial discipline and consistent records improves your chances of approval. 

Documents Required for a Business Loan 

The documentation process is much simpler today, especially through digital platforms like TallyCapital. 

Basic Documents 

• PAN Card and Aadhaar Card 
• Proof of business registration (GST, Udyam, or Shop License) 
• Bank statements for the last 6–12 months 
• Recent Income Tax Returns 
• Proof of business address 

Additional (for companies or partnerships) 

• Partnership Deed / MoA / AoA 
• Certificate of Incorporation 
• Director/Partner KYC 
• Financial Statements (P&L, Balance Sheet) 

TallyCapital uses TallyPrime data to reduce paperwork and accelerate loan processing. 

Benefits of Taking a Business Loan 

Also read – Business Loan Myths Debunked: What Every Small Business Owner Should Know

How to Apply for a Business Loan via TallyCapital 

TallyCapital enables TallyPrime users to discover, compare, and apply for business loans directly from their TallyPrime platform. 

Steps to Apply: 

1. Open TallyPrime ‘Charts of accounts’ → Go to TallyCapital  
2. Enter your phone number and verify it through OTP.  
3. View pre-qualified offers based on your business data. 
4. Start your application and fill in the required details digitally. 
5. Get offers from the lending partners and choose your preferred lender.  
6. Get Quick Approval and Disbursal directly into your bank account. 

This digital-first process removes manual paperwork, reduces approval time, and connects you to trusted, RBI-approved lending partners. 

Common Reasons for Loan Rejection 

Understanding rejection factors can help you prepare better: 

• Low credit score 
• Irregular cash flow 
• Multiple loan applications in a short span 
• Non-filing of GST or ITR 
• Mismatch in business and banking details 
• Existing overdue loans 

💡 Maintaining clean financial records in TallyPrime helps prevent most of these issues. 

How to Improve Business Loan Eligibility 

Simple practices can significantly improve your loan eligibility: 

1. Maintain a credit score above 750 
2. Repay EMIs and dues on time. 
3. File GST and ITR regularly. 
4. Keep business bank transactions consistent. 
5. Avoid over-leveraging or taking multiple loans. 
6. Ensure accuracy in your TallyPrime records. 

Why Choose TallyCapital?

TallyCapital connects TallyPrime users to India’s leading lenders, making business financing simpler, faster, and more transparent. 

Advantages include: 

• Pre-qualified offers based on your business data. 
• Minimal documentation and quick approval. 
• Transparent rates and zero hidden fees. 
• Secure, paperless process. 
• Multiple lender options in one place. 

With TallyCapital, MSMEs can focus on running their business while accessing trusted finance seamlessly. 

Frequently Asked Questions 

Q1. What is the minimum loan amount I can get? 

Business loans usually start from ₹50,000 and can go up to ₹50 lakh or more, depending on your business performance and lender eligibility.

Q2. Do I need a collateral for every business loan? 

Not always. Many loans offered via TallyCapital’s partner lenders are unsecured, meaning no collateral is required. However, loans like Loan Against Property (LAP) or Machinery Loans are secured and backed by assets.

Q3. How fast can I get the loan? 

Eligible businesses can receive approval and disbursal within 24–72 hours, depending on the lender.
If you apply through TallyCapital,  your business data is verified through TallyPrime and the process is faster and requires minimal documentation.

Q4. Does my credit score affect approval? 

A credit score of 750 or above improves your chances of approval and helps you secure better interest rates.

Q5. Can I prepay my loan? 

Yes. Most lenders allow early repayment or foreclosure with minimal or no charges.
This helps you save on overall interest costs.

Q6. What documents are required for a business loan?

You’ll typically need:

• PAN & Aadhaar Card

• Proof of business registration (GST, Udyam, Shop License)

• Bank statements (6–12 months)

• ITR or financial statements
  Through TallyCapital, much of this data is pre-verified within TallyPrime, reducing manual submission.

Q7. Can I get a loan if my business is new or small?

Yes. New or small businesses can apply for collateral-free MSME loans under schemes like CGTMSE or MUDRA. Lenders may also assess your business based on turnover, GST filings, and transaction history in TallyPrime.

Q8. How does TallyCapital help me get a business loan?

TallyCapital connects TallyPrime users directly with trusted lending partners to make financing simple and transparent. It helps you:

• View pre-qualified loan offers

• Apply digitally with minimal documentation

• Get quick approvals and disbursal

All directly within your TallyPrime platform.

Conclusion: Credit That Helps You Grow Confidently 

A business loan is not just financial assistance; it’s a growth enabler. It ensures your business never misses an opportunity due to lack of funds. 

With TallyCapital, MSMEs can access fast, transparent, and responsible credit options, right within TallyPrime. 

No paperwork, no intermediaries – just reliable funding tailored to your business.