Is Credit Score Of Business Loans Important?

Credit scores are important to lenders while deciding whether to grant home loans to businessmen. Credit scores help lenders understand how well businessmen handle business matters and how they manage their finances.

You probably do not know that just as home loan borrowers get credit scores, so do the business enterprises. Do not be under the impression that the banks and financial institutions will not get to know about an individual's past business performances.

MakaaniQ tells you more about how credit score of business loans can play a crucial role if you want to take a home loan.

Where does lender find credit information of business entity?

The Credit Information Bureau of India Limited (CIBIL) produces a company credit report (CCR). A CCR is a record of a company's past credit dealings. A CCR is established based on data and facts submitted by banks and financial institutions. But CCR is not a credit rating. It only shows past credit history that helps to assess and process home loan application of a business owner.

Companies to work out better credit terms with the lender can use a positive CCR that reflects financial strength of the company. If you have a business and want to take a home loan, CCR of your company (to check the business credit) along with your personal credit will be scrutinised by the lender.

What details do CCR consist of?

• Name of the company
• Nature of business activity
• Number of credit facilities taken by the company
• The type of loans taken in the name of the company
• The total number of loan enquiries made in the name of company
• Details about shareholders, directors, partners, holding companies etc.
• Guarantor's details that guaranteed credit facility taken by the company
• Credit facilities guaranteed by the company

What do lenders look for in your CCR?

• Repayment capacity: Banks and financial institutions review the repayment track of businesses to see if they have a sound and a clean repayment track. Defaults or pending installment dues can lead to the home loan application being rejected in all probability.

• Collateral: Collateral is used to determine the financial strength of the company by looking at inventory or stocks, plant and machinery, properties, account receivables, cash flows etc. Bank usually ask for both primary as well as secondary collateral/security from the company.

• Capital: Lenders will also examine the quality of capital or equity of the owner in the company. They will always check or the ask the owner for sources of invested capital in the company. Strong equity raises your home loan eligibility. Capital determines the strength of the company during tough times.

• Leverage: Leverage is measured as the ratio of total debt to total assets. Greater the amount of debt, greater will be the leverage. In simple terms, it refers to debt or borrowing of funds to finance the purchase of a company's assets. There are two ways of doing this: debt and equity. It helps in evaluating the return on investments of the company.

• Inventory: Lenders also review raw materials and stocks of the company (mostly by way of turnover ratios) which are ready for sale.

• Receivables Turnover: The lenders review account receivables or sales to understand the saleable factor of the product.

• Gross Profit Margin: This is the financial metric used to assess the company's financial health by looking at the proportion of money left over from revenues after accounting for the cost of goods sold.

• Liquidity: Lenders will assess the net working capital of the company.