The Role of Personal Credit in Business Loan Approval

Table of Content

1. Introduction

2. Understanding Personal Credit

3. How Personal Credit Impacts Loan Approval

4. Improving Personal Credit for Loan Approval

5. Conclusion

Introduction

Most entrepreneurs require MSME loans to expand their business, but few people know how much personal credit matters in the process. For small businesses, especially those with no established business credit history, personal credit becomes an important tool. Lenders look at personal credit as a reflection of the reliability of the person and his personal habits with money. A good personal credit score could be a matter of loan approval and disapproval. Knowing its relevance will be the first move to secure funding for your business.

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Understanding Personal Credit

What is Personal Credit?

It defines personal credit as your capacity to borrow money and repay it. The score is determined based on the credit history that gets reflected in a three-digit number that signifies the credit score. Your credit score is calculated based on your financial activities, such as those calculated by CIBIL in India.

Factors Influencing Personal Credit

There are multiple factors that influence personal credit score:

• Payment History: Loans and credit card payments within the agreed-upon time will reflect positively, whereas a late payment or missed one affects the score poorly.

• Credit Utilization: The usage of too much available credit lowers your score. Maintaining utilization below 30% is good.

• Length of Credit History: A lengthy credit history is very important for one’s score; it improves with the length of your credit history.

• Credit Mix: Having a mix of secured (like home loans) and unsecured credit (like credit cards) is beneficial. So that the lender can easily understand your capability of repaying those different credits.

• New Credit Inquiries: Applying for a few loans or credit cards within a very short period affects your score in a negative manner. As every time you apply, a soft pull of your credit score occurs which lowers it.

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How Personal Credit Impacts Loan Approval

In Lender’s Perspective

Banks and financial institutions like NBFCs sometimes look at the owner’s personal credit because this is somewhat tied to the business. Here’s why personal credit matters to them:

• Credibility: If you have a good credit score, that means you manage your finances properly, making lenders more confident in your ability to pay back the loan on a timely basis.

• No Business Credit History: If you have a new business or a very small business, you probably do not have your own credit history. In such cases, lenders use your personal credit as the primary measure.

• Interest Rates: You may be able to achieve lower interest rates with higher personal credit scores, making borrowing cheaper.

Usually, a score of 750 and above is good for lenders in India. Scores less than this can lead to a higher interest rate or rejection of the loan.

Improving Personal Credit for Loan Approval

Here are some practical steps to improve your credit score;

• Pay Bills on Time: Late payments hurt your credit score. Set reminders or automate payments to ensure you never miss EMI due dates.

• Lower Outstanding Debt: Consolidate debts, including other loans and credit cards, or pay off balances. In doing this, your utilization ratio will be enhanced.

• Do Not Apply Frequently for Loans/Credit Cards: Too many applications over a short space of time send red flags about financial instability.

• Review Credit Report: There may be some errors in it. Such errors will affect your score. Obtain your credit report and dispute error entries with the credit reporting agency.

• Maintain a Healthy Credit Mix: Maintaining a balance between various forms of credit helps boost your score. Do not focus solely on one type of credit, such as credit cards, personal loans, etc.

• Be Patient: This would improve credit, and it takes time to do so. Consistent efforts will eventually show results; hence, you should not look for overnight changes.

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Conclusion

Personal credit is of utmost importance in securing Kinara business loans, especially for the entrepreneur or small business owner. With a good personal credit score, it gives you a better chance at approval, helps you obtain favorable terms, and proves your financial responsibility. Knowing how personal credit works and doing things to improve it can really make a difference in your financial journey. But, building good business credit is also very important, but the balancing of both is the key to long-term success.

Additionally, NBFCs have more flexible criteria in eligibility compared to conventional banks and tend to be much more ready to work with entrepreneurs with lower credit scores or otherwise unique financial conditions. Thus, they become the best option for small businesses that require quick funding with easier accessibility. Exploring NBFCs will be a smart move, especially where traditional lenders do not meet all your needs.