In the second quarter of the financial year 2023, the average MSME loan size crossed the amount of ₹9.5 million. Now, this is more than double the ₹4.5 billion which was borrowed in 2020. There are a few reasons for this, which include the immense growth of India’s MSME sector and its financial requirements.
With the need to meet the growing population’s demands, it is obvious that such complementary events occur. Now, if you’re considering an Overdraft Loan (OD) to manage your MSME business finances, it can be a lifeline. While it has been the same for many small business owners, a misconception of it has risen.
The smog in the air is that a good credit score is a must-have for overdraft loan eligibility. Well, the answer is that it is one of the important parts of loan approval, but for clarity on whether it’s a must-have or not, we must gain more knowledge. Continue reading to explore more about overdraft loans, their eligibility, and their relation to credit scores.
What is a Good Credit Score?
A credit score is a number highlighting your creditworthiness. It is based on your credit history and financial behaviour. In India, this score ranges from 300 to 900. If you have a higher score, it determines lower credit risk.
The range of 700 and above depicts a good credit score and eases availing of MSME services. It, in turn, helps indicate to banks that you have a history of responsible borrowing and are more likely to repay your debts on time. Factors such as paying bills on time, low credit utilisation and a diverse credit mix contribute to a higher credit score.
How Does Your Credit Score Affect Overdraft Loan Eligibility?
When you apply for an overdraft loan, there are different factors that banks take into consideration. These factors include your credit score, your business’s revenue, profitability, and financial stability. Although having a good credit score is important, it is not the only criterion that determines your overdraft loan eligibility.
Banks may also evaluate your business’s financial health and its ability to repay their MSME loans. Ultimately, a combination of these factors determines whether or not you will be approved for an overdraft loan. Besides this, other aspects of overdraft loan eligibility are:
- Industry Risk: Certain industries may be perceived as riskier than others, affecting your eligibility. Banks may evaluate the industry in which your business operates and its associated risks before extending credit. For example, industries with volatile market conditions or high competition may face greater scrutiny from banks.
- Collateral Availability: While MSME services like overdraft loans are typically unsecured, some banks may require collateral to bear the risk. This is especially true in the case of larger loan amounts. Collateral can be in the form of business assets, property, or personal guarantees. The collateral’s availability and value can impact your eligibility and the terms of the overdraft facility.
- Cash Flow Consistency: Banks typically assess the consistency and stability of your business’s cash flow when evaluating overdraft loan eligibility. A steady cash flow indicates that your business generates sufficient income to cover expenses and repay the loan. Inconsistent or unpredictable cash flow may raise concerns for banks, impacting your eligibility for an overdraft facility.
- Regulatory Compliance: Staying compliant with regulations and industry standards is essential for businesses seeking overdraft loan eligibility. Banks may conduct due diligence to ensure that your MSME business complies with relevant laws and regulations, minimising legal and regulatory risks.
- Market Conditions: Economic factors and dynamic market conditions can also influence overdraft loan eligibility. Banks may consider macroeconomic trends, industry-specific challenges, and market demand when evaluating the risk associated with extending credit. Understanding the current market environment and positioning your business can enhance your eligibility for an overdraft facility accordingly.
Can OD Loan Still be Rejected Even With a Good Credit Score?
A good credit score does play a crucial role when you opt for MSME services. However, there are other factors as well that may influence the loan decision. Here are some situations where your loan application might be rejected despite a good score:
- Incomplete or Inaccurate Application: Ensure your application is complete, accurate, and includes all necessary documents.
- Negative Credit History: Even with a good current score, a history of late payments or defaults can negatively impact your application.
- Unsatisfactory Business Plan: If your business plan lacks clarity or fails to demonstrate financial viability, it can affect your loan approval.
Ensure Your Overdraft Loan Eligibility Today!
Regularly monitoring credit scores, timely debt payments, and demonstrating financial stability are a few things to ensure when seeking an MSME loan. While a good credit score is a crucial factor in overdraft loan eligibility, it’s not the sole determinant. You also need a bank by your side that will act as your robust financial partner, like HDFC Bank.
What HDFC Bank brings to the table is a range of MSME services that includes the Dukandar Overdraft facility, a popular option. It is available now in a digitised version that requires minimum paperwork and has a hassle-free process. If you’re looking for a high overdraft limit, competitive interest rates, and other favourable loan terms, contact HDFC Bank today.