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The Role of Credit Scores in Equipment Loan Application in India

Are you looking to grow your business by upgrading your machinery or investing in new equipment? You’re not alone! In today’s competitive market, staying ahead requires constant innovation and investment in cutting-edge technology. Equipment loans in India have become increasingly popular among businesses of all sizes, as they offer a convenient way to finance these essential purchases without disturbing your working capital. 

In this blog, we will explore the significant role that credit scores play in the equipment loan application process, and provide you with valuable insights to improve your chances of securing the best possible loan terms.

Brief overview of equipment loans in India

Equipment loans are a specialized form of financing designed to help businesses acquire, upgrade, or replace machinery and other essential equipment. These loans typically cover a wide range of assets, including manufacturing equipment, medical devices, construction machinery, and more. 

In India, both banks and Non-Banking Financial Companies (NBFCs) offer equipment loans, with varying interest rates and repayment terms based on several factors, including the borrower’s creditworthiness.

Importance of credit scores in the loan application process

One crucial aspect of the equipment loan application process is the evaluation of the borrower’s credit score. A credit score is a three-digit number that reflects your creditworthiness based on your financial history. Lenders use this score to gauge your likelihood of repaying the loan on time. 

A high credit score not only increases your chances of approval but also helps you secure better interest rates and more favorable loan terms. In the upcoming sections, we will delve deeper into the factors that influence credit scores, how they affect equipment loan applications, and the steps you can take to improve your credit score to enhance your eligibility for loans. Stay tuned!

 Understanding Credit Scores

Navigating the world of equipment loans can be challenging, but having a solid understanding of credit scores will give you an edge in securing the best loan terms. In this section, we’ll break down the concept of credit scores, explore the various credit score ranges, identify the factors that influence them, and introduce you to India’s major credit bureaus.

Definition of credit score

A credit score is a three-digit number that represents a summary of an individual’s or a business’s credit history. It serves as an indicator of creditworthiness, helping lenders assess the risk associated with extending credit to a borrower. Credit scores are calculated based on various factors such as payment history, outstanding debt, and the length of credit history. The higher the credit score, the more creditworthy the borrower is perceived to be, and the more likely they are to receive favorable loan terms.

 Credit score ranges and their implications

Credit scores typically range from 300 to 900, with different categories indicating the borrower’s creditworthiness:

  1. Poor (300-549): Borrowers in this range are considered high risk, and they may face difficulties in obtaining loans or may receive higher interest rates.
  2. Fair (550-649): This range indicates moderate creditworthiness, and borrowers may receive loan approvals but with less favorable terms.
  3. Good (650-749): Borrowers with good credit scores are considered low risk and are more likely to receive loan approvals with competitive interest rates.
  4. Excellent (750-900): This range signifies an exceptional credit history, and borrowers are likely to receive the best loan terms and the lowest interest rates.

Factors that influence credit scores

Understanding the factors that influence credit scores is crucial for maintaining and improving your creditworthiness. 

  • Payment history: A major component of your credit score is determined by your track record of making timely payments. Making timely payments on loans and credit cards can boost your credit score, while late or missed payments can harm it. For example, if you consistently pay your credit card bill on time, your credit score will improve over time. Conversely, if you miss a few payments, your credit score will likely drop.
  • Credit utilization ratio:This metric represents the proportion of your total available credit that is presently in use.. A lower ratio, preferably below 30%, is better for your credit score. For instance, if you have a credit card with a limit of INR 100,000 and you’ve used INR 20,000, your credit utilization ratio is 20%. Maintaining a low credit utilization ratio signals responsible credit behavior and can positively impact your credit score.
  • Length of credit history: A longer credit history with a good track record of timely payments is beneficial for your credit score. For example, if you’ve had a credit card for 10 years and always paid your bills on time, this long history of responsible credit usage will likely result in a higher credit score compared to someone who has only had a credit card for a year.
  • Credit mix: A diverse credit portfolio, including a combination of secured (e.g., home loans, auto loans) and unsecured loans (e.g., personal loans, credit cards), can improve your credit score. Lenders view borrowers with a varied credit mix as more financially responsible, as it demonstrates their ability to manage different types of credit. For example, if you have a home loan, an auto loan, and a credit card, and you manage all of them responsibly, your credit score may be higher than someone who only has a credit card.
  • Recent credit inquiries: Multiple loan or credit card applications in a short period can negatively impact your credit score. Each application results in a “hard inquiry” on your credit report, which can temporarily lower your credit score. Lenders may view multiple hard inquiries as a sign of financial distress, making them more cautious about extending credit. For example, if you apply for three credit cards within a month, your credit score may drop, and future lenders may be hesitant to approve your loan applications.

India’s major credit bureaus

In India, there are four major credit bureaus responsible for calculating and maintaining credit scores:

  1. TransUnion CIBIL
  2. Equifax
  3. Experian
  4. CRIF High Mark

These credit bureaus collect financial data from various sources, such as banks and NBFCs, to create credit reports and calculate credit scores. Lenders typically refer to these credit scores when evaluating loan applications.

By understanding the importance of credit scores and the factors that influence them, you’ll be better equipped to manage and improve your creditworthiness, paving the way for more favorable equipment loan terms.


 The Impact of Credit Scores on Equipment Loan Applications

Understanding the relationship between credit scores and equipment loan applications is crucial for businesses seeking financing. In this section, we’ll explore the eligibility criteria for equipment loans, how credit scores affect interest rates and loan terms, and the significance of a good credit score for loan approval.

Eligibility criteria for equipment loans

While the specific eligibility criteria may vary among lenders, some common requirements for equipment loans include:

  • Business vintage: Lenders often require businesses to be operational for a minimum number of years, generally ranging from 1 to 3 years.
  • Annual turnover: A minimum annual turnover may be required to ensure the business has the financial capacity to repay the loan.
  • Credit score: A good credit score is essential for demonstrating creditworthiness and increasing the likelihood of loan approval.
  • Collateral: Depending on the lender, some equipment loans may require collateral, such as the equipment being purchased or other business assets.
  • Business plan: A well-prepared business plan showcasing the purpose of the equipment and its impact on the business’s growth and profitability can strengthen your loan application.

Choose Refer Loan, and experience unmatched support for all your machinery financing needs.

How credit scores affect interest rates and loan terms

Credit scores play a crucial role in determining the interest rates and loan terms offered by lenders. Here’s how

  • Lower interest rates:Suppose two businesses, Business A and Business B, apply for equipment loans. Business A has a credit score of 750, while Business B has a credit score of 620. Due to the higher credit score, lenders perceive Business A as a low-risk borrower and offer them an interest rate of 10%. In contrast, Business B is offered an interest rate of 14% because their lower credit score signals a higher risk. In this scenario, Business A would save significantly on interest payments over the loan term compared to Business B.
  • Better loan terms:Continuing with the example of Business A and Business B, let’s say both businesses need a loan of INR 1,000,000. Due to Business A’s higher credit score, the lender offers them a repayment period of 5 years, while Business B is given a repayment period of 3 years. This means that Business A will have lower monthly payments and more time to pay off the loan compared to Business B, easing their cash flow and allowing them to invest in the other areas of their business.
  • Faster approval: When lenders review loan applications, they assess the creditworthiness of the borrower to gauge their likelihood of repaying the loan on time. A higher credit score indicates a history of responsible credit behavior, which reassures lenders and can expedite the loan approval process. For example, Business A, with its high credit score, may receive a loan approval within a week, while Business B might have to wait for several weeks due to the additional scrutiny required for their lower credit score.

The significance of a good credit score for loan approval

Maintaining a good credit score is essential for the following reasons:

  • Higher chances of approval: Borrowers with good credit scores are more likely to receive loan approvals, as they demonstrate a history of responsible credit behavior.
  • Negotiation power: A strong credit score can give borrowers leverage when negotiating interest rates and loan terms with lenders.
  • Access to more lenders: Good credit scores allow borrowers to choose from a wider range of lenders, including traditional banks and NBFCs, increasing the chances of finding the right loan product.

In conclusion, credit scores have a significant impact on equipment loan applications. A good credit score can improve your chances of approval, secure lower interest rates, and provide access to better loan terms.By understanding the factors that influence credit scores, businesses can make informed decisions to improve their creditworthiness and successfully navigate the equipment loan application process.

Tips to Improve Your Credit Score

Boosting your credit score can unlock better loan terms and interest rates, making it easier for you to secure equipment financing. In this section, we’ll share practical tips to help you improve your credit score and enhance your creditworthiness.

  • Regularly checking your credit report

Keeping tabs on your credit report is essential for identifying any inaccuracies or discrepancies that might negatively impact your credit score. You can obtain your credit report from any of the four major credit bureaus in India. Regularly reviewing your report enables you to spot and rectify errors, ensuring your credit score accurately reflects your credit history.

  • Timely payment of bills and EMIs

  The history of your payments plays a crucial role in calculating your credit score.To maintain a healthy credit score, ensure that you pay all your bills, loan installments, and credit card dues on time. Setting up automatic payments and reminders can help you avoid late or missed payments, which can have a negative impact on your credit score.

  • Maintaining a low credit utilization ratio

Credit utilization denotes the proportion of your accessible credit that you are presently utilizing.

 A lower credit utilization ratio (preferably below 30%) signals responsible credit behavior and can boost your credit score. To maintain a low ratio, consider paying off your credit card balances in full each month, requesting a credit limit increase, or using multiple cards to spread out your expenses.

  • Avoiding multiple loan inquiries in a short span

Whenever you submit an application for a loan or a credit card, lenders conduct a “hard inquiry” on your credit report, which may temporarily cause a dip in your credit score.Multiple hard inquiries in a short period may indicate financial distress, making lenders more cautious about extending credit. To minimize the impact of hard inquiries, space out your loan applications and only apply for credit when necessary.

  • Diversifying your credit portfolio

A mix of different credit types, such as secured and unsecured loans, can demonstrate your ability to manage various forms of credit responsibly. This has the potential to positively influence your credit score.  However, it’s essential to ensure that you don’t take on more debt than you can comfortably manage, as this could lead to financial strain and difficulty making timely payments.

By following these tips, you can work towards improving your credit score, making it easier to secure equipment loans with favorable terms and interest rates. A strong credit score not only benefits your equipment financing endeavors but can also open doors to better financial opportunities in the future.

Alternative Financing Options for Low Credit Scores

A less-than-perfect credit score shouldn’t be a barrier to securing the equipment financing you need to grow your business. In this section, we’ll explore alternative financing options for borrowers with low credit scores, ensuring that you can still access the funds you need while working to improve your creditworthiness.

  • Non-Banking Financial Companies (NBFCs)

Non-Banking Financial Companies (NBFCs) offer a range of banking services, such as loans, without possessing a formal banking license. They often have more flexible eligibility criteria compared to traditional banks, making them a viable option for borrowers with low credit scores. However, it’s essential to be aware that NBFCs may charge higher interest rates to compensate for the increased risk associated with lending to borrowers with lower credit scores.

  • Government schemes and initiatives

The Indian government has introduced several schemes and initiatives to support businesses, particularly those in the Micro, Small, and Medium Enterprises (MSME) sector. Some of these schemes, such as the Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGMSE), can provide financial assistance to businesses with low credit scores. Research and explore the various government programs available to find one that best suits your business needs.

  • Peer-to-peer lending platforms

Peer-to-peer (P2P) lending platforms connect borrowers with individual lenders, creating an alternative source of financing. These platforms often have more relaxed eligibility criteria than traditional banks and may consider factors beyond your credit score when assessing your loan application. However, P2P loans may come with higher interest rates and shorter repayment terms, so it’s important to carefully evaluate the terms and conditions before proceeding.

  • Equipment leasing and rental options

If purchasing equipment outright is not feasible due to a low credit score, you may want to consider leasing or renting the equipment instead. Leasing arrangements typically require less stringent credit checks and offer more flexibility in terms of upgrading or replacing equipment. However, it’s important to note that leasing or renting equipment may be more expensive in the long run compared to purchasing the equipment outright.

By exploring these alternative financing options, businesses with low credit scores can still 

access the funds they need to invest in essential equipment. While working towards improving your credit score, these alternatives can provide the necessary resources for your business to grow and thrive.


To summarize, credit scores play a vital role in equipment loan applications, influencing eligibility, interest rates, and loan terms. A higher credit score can lead to more favorable loan conditions, including lower interest rates and extended repayment periods. By understanding the factors affecting credit scores and following the tips provided to improve them, businesses can secure better equipment financing options.

Maintaining a healthy credit score is essential not only for equipment financing but also for all your future financial endeavors. A strong credit score signals responsible financial behavior, which can open doors to various financing opportunities and ensure the sustained growth of your business. By working with Refer Loan and diligently managing your credit, you can create a solid financial foundation and achieve long-term success in India.

Hope you find it informative!

When it comes to making critical financial decisions for your business, it’s essential to have a reliable partner with the expertise and resources to help you navigate the complex landscape of machinery loans.

At Refer Loan, our mission is to simplify the machinery loan process by providing tailored solutions, competitive interest rates, and comprehensive support throughout the journey. Our team is here to guide you every step of the way, from helping you choose the ideal loan that matches your requirements to managing documentation, ensuring a smooth loan approval process, and speeding up disbursement.

Don’t hesitate to reach out to Refer Loan, as our team of professionals is ready to assist you in making the best decision for your company’s growth and future success in the competitive landscape of the Indian market. With Refer Loan by your side, you can rest assured that we’ll work together to find the most advantageous machinery loan solution for your unique business needs.

Komal Sharma

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