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Relevance of CIBIL Score while applying for Working Capital Loans

Relevance of CIBIL Score while applying for Working Capital Loans
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Web Admin

Web Admin

5 Dariya News

12 Apr 2024

A working capital loan helps to meet your day-to-day business requirements and manage business cash flow. It also assists in various business expansion purposes, as well as to fulfil your immediate business needs. Whether you own, manage and operate a small, medium or large enterprise, business or any start-up; credit products, such as working capital loans are always in demand.

If you are planning to apply for a working capital loan, remember that the approval of your loan application shall depend on your CIBIL score and various other vital components of your credit report. The CIBIL score is a 3-digit numeric that ranges from 300-900, which is calculated by the credit bureaus based on your credit information provided by the lending institutions on a monthly basis. 

Your generated CIBIL score is based upon your creditworthiness, payment history and various other factors. Find below the relevance and significance of checking your credit report periodically. 

Significance of your CIBIL score while applying for a Working Capital Loan

When you maintain a high CIBIL score (750+), it depicts your credit responsible behaviour that further helps lenders to gain confidence in your repayment capability and proceed with the loan approval process. 

A low CIBIL score may lead to instant loan application rejection due to the perceived high risk of default by the applicant. It is recommended to maintain your CIBIL score at least 700 to avail working capital loan at competitive interest rates from various lenders. It is always beneficial to check Credit Score online for free to know the possibility of clearing the eligibility criteria, as defined by the lending institution for working capital loans.

In case your CIBIL score is low, you can try to apply for the loan at institutions that cater to such applicants. There are few selected financial institutions such as Non-Banking Financial Companies (NBFCs), Small Finance Banks (SFBs) and Micro Finance Institutions (MFIs) that offer funds without considering your CIBIL score. 

However, the interest rates offered are on the higher side, as compared to the interest rates offered against lenders catering to applicants with high CIBIL scores.

 Basics of Working Capital Loan

Read on to know more about working capital loans, their features, types, eligibility criteria and related aspects.

Features of Working Capital Loan

Find below the basics of working capital loans offered by leading financial institutions:

Purpose: To enhance business cash flow and to meet day-to-day business requirements.

Type: Overdraft, Cash Credit, Letter of Credit, Merchant Cash Advance, Credit Line, Account Receivables, etc.

Interest Rate: Varies from case to case and depends on the applicant's profile and financial stability, creditworthiness, types of collateral, annual turnover, business vintage and profitability

Loan Amount: As per business requirements, may exceed up to Rs. 1 crore

Collateral/Security: Depends on loan amount, nature of business and business requirements

Repayment Tenure: Up to 12 months, may exceed

Note: The above-mentioned features are indicative in nature and shall vary from case to case and lender to lender.

 Eligibility Criteria

The criteria may vary from lender to lender; however, the basic eligibility criteria may include the following:

CIBIL Score: Minimum 700 or above

Applicant’s Age: Minimum 21 years at the time of loan application and maximum 65 years at the time of loan maturity

Nature of Business: Individuals, self-employed professionals, sole proprietorships, partnership firms and private or public companies serving the manufacturing, trading and services sectors

Business Turnover and Profitability: Varies from lender to lender

Business Tenure: Operational for a minimum 2 years with profit (shall vary from bank to bank)

Business Experience: Minimum 2 years of same business at the current location

Ownership or Collateral Ownership: Ownership of a property in the form of residence, office, shop or godown

Additionally, the eligible businesses should be legally registered and operational. Businesses or enterprises shall demonstrate repayment ability via financial documents and must comply with legal and regulatory requirements.

Types of Working Capital Loans

Below-mentioned are various types of working capital loans that are mostly used byentrepreneurs and business owners to meet their urgent financial needs:

Credit Line

Overdraft

Bank Guarantee

Bill/Invoice Discounting

Cash Credit

Merchant Cash Advance

Invoice Discounting

Letter of Credit

Business Credit Cards

Categorization of Working Capital Loan

Working capital loans are categorized into two types, such as short-term and long-term working capital loans.

Short-term

Short-term working capital loan is a type of business loan in which the repayment period of loan amount is within 12 months. This type of loan is mainly used to meet day-to-day business requirements and manage business cash flow. These loans are also used to manage current cash crunch situations like paying rent, purchasing equipment, paying salaries, buying raw materials, paying-off suppliers, etc.

Long-term

Long-term working capital loan is primarily used to buy long-term assets or large equipment/machinery products. The repayment tenure of a long-term working capital loan is more than 12 months and can exceed up to 5 years. The maximum loan amount offered under long-term working capital loan is up to Rs. 1 crore, may exceed as per applicant's profile and business requirements.

Conclusion:

Working capital is primarily the difference between your business’ current assets and current liabilities. It is measured by simply taking out the difference between the assets and liabilities. 

It signifies how much of the liquidity is available to meet the daily business expenditure. Therefore, to improve the cash flow of your business, you may need to avail working capital loans (short or long term) as per your business regular expenditure. 

Do check and compare all the available loan options before applying and go through the terms and conditions thoroughly before signing any loan document. It is imperative to have a quick look at your credit score before you apply for a loan as it may help you save a substantial amount on the cost of credit.

 

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