What Is Credit Score & Why It Matters for Business Loans
If you’ve ever applied for a business loan or even a personal loan, you’ve probably heard the term credit score. But what does it really mean? Why do lenders care about it so much? And how can it affect your chances of getting a loan for your business?
In this detailed guide, we’ll break down everything you need to know about credit scores in simple and practical terms. Whether you’re a small business owner exploring your first loan or already managing multiple credit lines, understanding your credit score can help you make smarter financial decisions.
What is a Credit Score?
A credit score is a three-digit number that tells lenders how likely you will repay borrowed money on time. It’s basically your financial health score, the higher it is, the more confident lenders feel about giving you credit.
In India, credit scores typically range from 300 to 900.
- A score closer to 900 means you have a strong credit history.
- A score closer to 300 means you have higher credit risk.
Your credit score is calculated by credit bureaus such as CIBIL (TransUnion), Experian, Equifax, and CRIF High Mark, based on your credit behavior, factors like loan repayments, credit card usage, and credit inquiries.
Who Calculates Your Credit Score?
India has four main credit bureaus authorized by the Reserve Bank of India (RBI):
- TransUnion CIBIL
The most widely recognized credit bureau in India. Most banks and NBFCs rely on CIBIL scores to assess creditworthiness. - Experian India
Known for providing detailed insights on individual and business credit health. - Equifax
Offers reports on both individuals and small businesses. - CRIF High Mark
Popular among microfinance institutions and small business lenders.
Each of these bureaus uses slightly different formulas, but they all look at similar factors – repayment history, credit utilization, loan mix, and more.
Why is Credit Score Important for Business Owners?
When you apply for a business loan, lenders want to know one thing:
Can you repay it on time?
Your credit score helps them answer that question. It’s one of the first checks that lenders perform before evaluating other details like your business financials or cash flow.
Here’s how your credit score impacts your loan process:
| Credit Score Range | Creditworthiness | Chances of Loan Approval | Interest Rate Range |
|---|---|---|---|
| 750 – 900 | Excellent | Very High | Best Interest Offers |
| 700 – 749 | Good | High | Moderate |
| 650 – 699 | Average | Moderate | Slightly Higher |
| 550 – 649 | Poor | Low | High |
| Below 550 | Very Poor | Very Low | Very High (or rejected) |
For Business Owners Specifically:
- A strong credit score can help you get a larger loan amount and lower interest rate.
- A low credit score may lead to loan rejection or stricter repayment terms.
Even if your business cash flow is strong, lenders use your credit score as a signal of reliability. It reflects how responsibly you’ve managed previous financial obligations, personal or business.
How is Credit Score Calculated?
Let’s simplify the math behind it.
Each credit bureau uses its own algorithm, but the following factors generally carry the most weight:
| Factor | Weightage | What It Means |
|---|---|---|
| Payment History | 35% | Whether you’ve paid EMIs, credit card bills, and other dues on time. Even one missed payment can lower your score. |
| Credit Utilization Ratio | 30% | How much of your available credit you’re using. Ideally, it should be kept below 30%. |
| Length of Credit History | 15% | How long you’ve been using credit. The longer, the better. |
| Credit Mix | 10% | The balance between secured (like home or business loans) and unsecured loans (like credit cards). |
| New Credit Inquiries | 10% | Every loan applied through lenders counts as a “hard inquiry.” Too many applications in a short period can lower your score. |
Example: If you have a ₹2,00,000 credit limit and use ₹1,80,000 every month, your utilization is 90% which can signal high dependency on credit and hurt your score.
Business Credit Score vs Personal Credit Score
As a business owner, you might have two separate credit scores:
- Personal Credit Score:
Based on your individual financial behavior (loans, cards, etc.).
Used when your business is small or not registered as a separate entity. - Business Credit Score:
Reflects your company’s financial credibility like payments to vendors, loan repayment trends, business registration, etc. This is used when you apply for a loan in your company’s name.
Why Both the Credit Score Matter:
When applying for a business loan, lenders often look at both your personal and business credit profiles, especially for small or partnership-based firms. If either of them shows delayed payments or defaults, it can affect loan approval.
What Lowers Your Credit Score?
Here are some common habits that can unintentionally pull your score down:
- Missing loan EMIs or credit card payments
- Paying only the minimum amount due
- Using most of your credit limit regularly
- Applying for too many loans or cards at once
- Having no credit history at all (making it hard for bureaus to assess you)
- Defaulting or settling loans
Even if one EMI is delayed by 30+ days, it can stay on your credit report for months and affect future loan applications.
How to Improve Your Credit Score
Here are practical steps that can help you build or improve your credit score over time:
- Pay all EMIs and credit card bills on time.
Even one missed payment can hurt your score. Set reminders or automate payments. - Keep your credit utilization below 30%.
Example: If your card limit is ₹1,00,000, try to use only up to ₹30,000 monthly. - Avoid multiple loan applications at once.
Too many “hard inquiries” in a short span of time can impact your score negatively. - Check your credit report regularly.
Errors happen — sometimes wrong data or closed loans show as active. Correct them immediately with the bureau. - Maintain old credit accounts.
The longer your credit history, the better it looks. - Diversify your credit portfolio.
A healthy mix of secured (car, home, business loans) and unsecured (credit card) loans helps. - Don’t close credit cards suddenly.
Closing old accounts reduces your credit limit and history length; both can drop your score.
Also read: Easy Ways to Improve Your Business Credit Score
How to Check Your Credit Score (Free)
You can check your credit score for free from TallyCapital.
Here’s how:
- Visit this page – https://tallycapital.tallysolutions.com/free-business-credit-score/
- Enter your name, mobile number, PAN and email.
- Verify your mobile number using OTP.
- Click on ‘Get Credit Score’.
- And, your detailed credit report will be displayed.
Alternatively, you can check your credit score & business loan eligibility right within your TallyCapital plug-in — in just few minutes.
Why Lenders Check Credit Score for Business Loans
From a lender’s perspective, credit score acts as a risk assessment tool. It tells three key paramaters before approving a loan:
- Will the borrower repay on time?
- Can the borrower handle additional debt?
- How stable is their financial history?
This is why even if your business has steady revenue, a poor credit score can lead to loan rejection or higher interest rates.
Lenders like TallyCapital use your credit profile as part of a larger evaluation, combining it with business data from TallyPrime to offer faster and fairer loan decisions.
Common Myths About Credit Scores
| Myth | Reality |
|---|---|
| Checking your own score reduces it | False — soft inquiries don’t affect your score. |
| You can’t get a loan with a low score | Not always — lenders like TallyCapital also consider business performance, not just score. |
| Once low, credit score can’t be fixed | False — consistent payments can rebuild it within months. |
| Closing old loans improves score | False — it can actually reduce your average credit age. |
| Credit score is only for individuals | False — businesses also have separate credit scores. |
How Credit Score Impacts Business Loans
Your credit score doesn’t just decide whether you’ll get a loan; it also affects how helpful the loan will be.
| Credit Score | Typical Impact |
|---|---|
| 750+ | Quick approval, better interest, high loan amount |
| 700–749 | Decent approval, moderate interest |
| 650–699 | Limited loan options, higher rates |
| 550–649 | Hard approval, collateral may be needed |
| Below 550 | Rejection or very high interest |
So, if you’re planning to expand your business, buy inventory, or manage working capital, maintaining a good credit score gives you flexibility and negotiation power.
Credit Score vs. Credit Report – What’s the Difference?
Many people get confused between credit score & credit report the two. Here’s how they differ:
| Term | What It Is |
|---|---|
| Credit Score | A 3-digit number summarizing your credit health |
| Credit Report | A detailed record of your loans, repayments, defaults, and inquiries |
When you apply for a loan, lenders check both – your score gives a quick view, and the report shows the full story.
Factors that Affect Business Credit Score (for SMEs and MSMEs)
Your business credit score is influenced by more than just repayment history. Here’s what matters:
- Company age & registration details
- Revenue stability
- Loan repayment and outstanding amounts
- Credit payments (to vendors and suppliers)
- Public records (like tax filings or defaults)
- Business Owner’s or Partners’ credit history
How Long Does It Take to Improve Your Credit Score?
If your score is low, consistent effort can show results in 3–6 months. But serious issues like loan defaults may take 12–24 months to recover from.
The key is patience and consistency, lenders value long-term discipline.
How TallyCapital Uses Credit Scores for Business Loans
TallyCapital — the financial solution backed by your trusted Tally — leverages your credit score in addition to the business data on TallyPrime responsibly to make business loans more accessible and fairer.
Here’s how it works:
- You check your credit score directly on TallyPrime.
- Based on your credit report and Tally data, personalized loan offers from multiple lenders are shown.
- You choose the best offer and apply instantly — with minimal documentation.
Because TallyCapital already understands your business performance, it can look beyond just your credit score and offer more contextual loan options, even if your score isn’t perfect.
Quick Recap: Key Takeaways
- Your credit score is a 3-digit number (300–900) showing how creditworthy you are.
- It’s one of the first parameters lenders use while evaluating business loans.
- A score above 750 is considered excellent for business loans.
- You can improve your score through consistent repayments, low credit usage, and responsible borrowing.
- Both personal and business credit scores matter for MSMEs.
- TallyCapital combines credit score with your real business performance to give fairer loan options.
Frequently Asked Questions
- What is a good credit score to get a business loan?
A score above 750 is generally considered good and improves your chances of loan approval at lower interest rates. - Can I get a business loan with a low credit score?
Yes, some lenders (like TallyCapital) also consider your business data, not just your credit score. - How often should I check my credit score?
At least once every 6 months, or before applying for any new loan. - Does checking my credit score lower it?
No. Checking your own score is a soft inquiry and doesn’t affect it. - How long does it take to improve a low credit score?
Usually 3–6 months of consistent repayments and responsible credit behavior. - Can I get my credit score for free?
Yes. Every credit bureau in India allows you to get one free credit report per year.
Final Word
Your credit score is not just a number, it’s a reflection of your financial discipline and trustworthiness. For business owners, maintaining a good score can help you get better loan offers, faster approvals, and more growth opportunities.
With TallyCapital, you can now check your check score, view loan offers, and apply directly from your trusted TallyPrime, making credit simpler and smarter.
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