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The first question that is posed against a loan applicant by lenders in today’s world is, “What’s your CIBIL score?” The question often leaves the common man bewildered and bothered as to what the importance of this particular question is. The mental pressure that one deals with at the time of applying for a loan is at a pretty extreme level as it is without having to answer questions that are completely new or foreign. Bearing that in mind, let’s go on a journey of enlightenment about CIBIL and its importance.

1. What is a Company Credit Score?

A company credit score is a number that represents a company’s financial health based on the information collected from various financial institutions. The score will be stated in the company credit report. Lenders refer to such company credit reports to determine the creditworthiness of the company in question in response to their credit application.

2. What information does a Company Credit Report (CCR) contain?

Typically, a CCR contains the following information about the company in question:

  • Background details: The initial segment of a CCR states the background information about the company. The details include the parent company, subsidiaries, ownership details, establishment year, and so on.
  • Credit score:

    The credit score given to companies varies based on the credit rating agency you choose to get evaluated. If you wish to get your business evaluated by TransUnion CIBIL, then the score may range from 1 to 10 where 1 is the best rank and 10 is the worst. The closer your company’s score is to 1, the higher are the chances of getting a good deal on your business loan.

    Another RBI-approved agency, CRIF India, offers a score in the range of 300-900 and follows the guidelines as specified by RBI. In this case, a score of 700 and above is considered a good score and indicates that the company has a good repayment track record on previously availed credits.

  • Financial details:

    The next segment, financial details, provides information on the company’s current financial position. This lets the lender decide on the loan amount that is ideal to be given to the company based on the company’s repayment capacity.

  • Payment history:

    Before a lender decides on offering a loan to a company, it is only apparent to check if the company has been making the monthly instalment payments on time to the other lenders so far.

    Therefore, credit rating agencies keep track of the payment history for a specific period. For example, CRIF India keeps track of the financial transactions made by your company for the past 36 months.

    This section also includes information relating to your company being a surety party for any credit facility.

  • Previous searches:

    Past searches segment refers to details of inquiries requested by lenders on your company’s credit report/score over the last 24 months. This segment reveals how many times your company has looked out for credit facilities over the specified period. A high number of past searches indicates that all is not well with your business and cash flow. It may also be seen in a negative light where your company is not in a good condition and may not be able to repay the received debt; worse even, it could indicate that your company is about to go bankrupt.

3. Factors to evaluate a company and determine CCR

Here’s a list of factors that influence the CCR. Remember that the factors considered may vary based on the credit rating agency.

  • Capacity: Capacity refers to the ability of the company to repay the loan. The capacity of a company is decided based on the company’s current and future income, the sales of the company’s products, the popularity of the brand in the market, and many other factors.
  • Collateral: The kind of assets and properties a business owns makes a massive difference in the availability of loan and the extent to which loan can be expected. Here, assets and property include business inventory, accounts receivable, equipment and machinery, commercial vehicles, land, factory, stores, and other tangible assets. Based on the net worth of these assets and properties, the ease of getting a loan is determined. Pledging any of the assets/property can ease the process.
  • Capital: The capital investment made by the company’s proprietor and/or partners is an essential factor when a business seeks a loan from a lender. Only if the business owner makes sufficient investment they can approach a lender for additional capital in terms of a loan. If the capital investment is not up to the mark, one cannot expect a loan.
  • Financial ratios: There are several ratios associated with a company that can determine the creditworthiness of a company, such as liquidity, leverage, inventory, turnover, receivables turnover, gross profit margin, and return on sales. These factors can give insights into the financial condition of a company in detail.
  • Repayment history: Taking loans is an essential part of running a business. However, how well the company manages to repay the loan as agreed upon while taking the loan acts as a primary indicator of the company’s efficiency.
  • Size and life of the company: Older a firm is, the higher the possibility of the firm having a better score. A startup usually has a lower CCR. This is because companies that were established a long time back would have seen continuous growth and are believed to be more credible in comparison with the newer and smaller companies.
  • Industry The industry of your company can play a huge role as the lenders tend to decide on the risk factor based on the industry you are in. Consider the case of a real estate company. The risk associated with the industry is high since the business can be unpredictable and volatile subject to many economical and political factors. Therefore, such a company may be considered less creditworthy.

4. What is a CIBIL Score?

CIBIL stands for Credit Information Bureau India Limited. All the information with regard to CIBIL scores and the like are stored by TransUnion CIBIL, India’s first credit information company. A CIBIL score is a credit score that is assigned based on a person’s/company’s credit history. The score reflects the creditworthiness and answers questions such as:

  • How many loans are currently availed?
  • Have the payments been made on time?
  • Is there any record of a payment that was missed/ loan that was defaulted on?
  • What are the repayment history details?
  • What are the types of credit that have been availed?
  • What is the length of the credit history?

5. Importance of Obtaining a Good CIBIL Score

The CIBIL score of a person/company is equivalent to its credit footprint. In simple words, at the time of applying for any kind of credit facility, it is imperative that the lenders (banks and financial institutions) are aware of the applicant’s ability to make timely payments and the assurance that they will get their money back. This is done by having a look at the credit history, which is reflected through the CIBIL score. The judgement of creditworthiness is done based on the score obtained by that particular person/company.

The CIBIL score ranges between 300 and 900. The higher the score, the better the chances of getting the credit facilities approved. The 3-digit score is derived from the details of loan accounts and credit card facilities availed, the status of payments with respect to each one, the time period left for that particular facility and the like.

In order to avail an unsecured business loan, the credit score of that particular person must be over 700, mandatorily. If the application is made for a secured business loan, the credit score could ideally range between 600 and 700. However, if the applicant is not an individual but an entity (partnership firm, LLP, private limited company), the business credit score (CIBIL Rank) and the Company Credit Report (CCR) play a major role apart from the personal credit score in the loan approval process.

6. CIBIL CCR and CIBIL Rank

Companies avail credit facilities in large volumes and on a regular basis. The funds required for day to day operations, the funds required for restructuring or any plans with regard to growth and expansion often fuel the necessity for immediate availability of ready capital.

One of the main reasons behind this is that the company wishes to capitalise on existing opportunities at the earliest and turn it into an extremely favourable situation. At the time of extending such facilities to the companies, the lender has to be aware or be well informed about the company’s creditworthiness, its ability to repay the loan within the stipulated period.

Just as the CIBIL score is a record of an individual’s credit history, the CIBIL CCR is a record of the credit history of a company. CCR stands for Company Credit Report.

The CCR contains the following details:

  • Details of the borrower
  • Contact details
  • Details regarding identification (Company PAN, Company Identification Number)
  • Delinquencies reported on the borrower
  • Derogatory information (lawsuits, overdue credit facilities)
  • Details of outstanding balances
  • Related party details
  • Credit Rating Summary
  • Enquiry Details (made by a particular lender for the company’s credit application)

CIBIL Rank is a summary of the Company Credit Report in the form of a single number. The CIBIL Rank ranges between 10 and 1. A rank between 4 to 1 indicates that the chances of getting the credit facilities sanctioned is relatively high. Anything more than 4 is an indication that approval of the loan application may not be as easy.

Nevertheless, it is to be noted that the CIBIL Rank is provided only to businesses that have a credit exposure or an outstanding loan of Rs. 10 lakh to Rs. 50 crore.

7. Checking Your CIBIL Score

The CIBIL score can be checked at any time on CIBIL’s official website. There are a couple of steps to be followed in order to obtain the CIBIL report:

  • An account must be created on the website entering basic details such as username, password and email id.
  • Verification of identity has to be done.
  • The OTP has to be entered into as and when it is received.

8. Keeping a Good and Healthy CIBIL Score

Firstly, it is important to understand the factors which affect the calculation of the CIBIL score. They are:

  • Repayment history
  • Outstanding Balances
  • The credit period
  • List of loans applied for and their details
  • Credit mix (Secured and unsecured loans)

Understanding the factors affecting the credit score further helps the person make informed decisions about how to maintain a healthy CIBIL score. A few pointers include:

  • Purchase of smaller electronic items on EMI basis
  • Applying for a credit card in the bank where an account exists
  • Avoid any sort of delay in payments
  • Avoid taking multiple credit facilities at once
  • Maintain a good credit mix (have a balance of both secured and unsecured loans)
  • Verify the CIBIL report so as to eliminate any inaccuracies

Applying for a business loan is a very tricky process. What’s trickier is getting that particular loan sanctioned with speed and ease. However, shining the light on something as important as the CIBIL score could go a long way in helping a person or a company secure their financial needs on a faster basis so that the needs are satisfied as and when necessary.

Disclaimer:The materials provided herein are solely for information purposes. No attorney-client relationship is created when you access or use the site or the materials. The information presented on this site does not constitute legal or professional advice and should not be relied upon for such purposes or used as a substitute for legal advice from an attorney licensed in your state. Users are requested to carefully read the terms and conditions and privacy policy of any third party websites used in the article.

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