Credit score is a key feature that helps to decide the eligibility of loan amount and interest rates while borrowing for any kind of a loan. It is a misconception that credit score is only required for salaried professionals because of their limited income source. It is to note that credit score is equally important for self employed professionals as it reflects the ability to borrow and the capability to repay the loan amount.
Credit scores are important to all kind of Banks/ NBFC’s and other financial institutions that helps in deciding whether to grant home loans to businessmen or not. These credit scores help the lenders to understand how well businessmen handle its business matters and how well managed their finances are.
You probably may not know that just similar to home loan borrowers who get credit scores, so do the business enterprises. Do not have any wrong impression that the Banks/ NBFC’s and the other financial institutions will not get to know about your individual’s past business performances.
Very few people know that even to borrow a home loan the credit score of business loans also play a crucial role. An important question that arises after reading the above statement is where does lender find credit information of business entity?
The CIBIL (Credit Information Bureau of India Limited) produces a company credit report (CCR) for every individual and the business depending on their financial transactions or we can say that a CCR is a record of a company’s past credit dealings. A CCR is prepared based on data and facts submitted by banks and financial institutions about a particular individual and business. But keep in mind that CCR is not a credit rating. CCR only reflects past credit history that helps to calculate and process home loan application of a business owner.
Companies provide a strong positive CCR to reflect the financial strength of the company to work out better credit terms with the Banks/NBFC’s. In case you want to borrow a home loan and you have a business, CCR of your company (to check the business credit) along with your personal credit will be assessed by the lender.
These are the following details a CCR consist of?
• Company’s name
• Nature of business activity
• Number of credit facilities borrowed by the company
• The type of loans and other debts taken in the name of the company
• The total number of enquiries made in the name of company for the loan
• All details about the shareholders, directors, partners, holding companies etc. of the company
• Guarantor’s details who takes the guarantee towards the credit facility taken by the company
• Other Credit facilities guaranteed by the company
On what features your CCR is assessed?
Repayment capacity: Banks/NBFC’s and other financial institutions review the repayment track of business and the businessman to know if they have a sound and a clean repayment track. Defaults, bounced EMI’s or any other pending installment dues can lead to the home loan application being rejected in all probability.
Collateral/ Security: The collateral provider by the borrower is used to determine the financial strength of the company by analyzing your properties, inventory or stocks, cash flows, plant and machinery, account receivables etc. Bank usually ask for both primary as well as secondary collateral/security from the company for the further process of the home loan.
Capital: Banks/ NBFC’s will also examine the quality of capital or equity of the owner in the business. The lenders might check or the ask the owner to provide the sources of invested capital in the business. Strong equity raises the eligibility of your home loan. Capital present in the business determines the strength of the company during tough times.
Leverage: Leverage is a financial tool used to measure the ratio of total debt to total assets. Higher the amount of debt, higher will be the leverage. In simple words, leverage refers to the debt or borrowing extra funds to finance the purchase of a company’s assets. This can be done by two ways: debt and equity. It also helps to evaluate the return on investments of the company.
Inventory: Banks/NBFC’s also review the raw materials and stocks of the company (mostly by way of turnover ratios) which are ready to be shipped.
Receivables Turnover: The account receivables or sales is reviewed by the lender to understand the sale able factor of the product.
Gross Profit Margin: It is a financial tool used to evaluate the company’s financial health by examining at the proportion of money left from the generated revenues after accounting for the cost of goods sold.
Liquidity: Lenders will assess the net working capital of the company.