Business loans can be challenging to get, especially if you have a low credit score. It’s a complicated process that usually requires a lot of paperwork and meeting different requirements, depending on the loan you’re trying to get.
A credit score is an essential part of this process, as it shows your trustworthiness as a borrower. Having a low credit score might make you ineligible for some loan types. Here’s everything you should know about how your credit score impacts your business loan eligibility:
There usually isn’t a minimum credit score value that would determine whether you’re eligible for a particular loan or not. However, there are some estimates that lenders tend to prefer, and they usually won’t approve a loan to an individual whose score falls outside their preferred range.
Sometimes the lender might make an exception if the borrower fits perfectly with their other requirements or exceeds expectations in that regard. However, you can’t count on being the exception if your credit score is much lower than what the lender would prefer. A business owner might have both personal and business credit score to manage, but what’s the difference between the two?
Most major credit bureaus like Equifax and Experian use the same methodology of evaluation of your personal credit: the FICO score. Some of the factors taken into consideration by the FICO score include your:
It’s a proprietary score, so it’s unclear exactly which factors influence the FICO score the most, and how it’s calculated. Still, you should keep in mind that your general financial state and behavior determine your credit.
Your business credit score is quite similar to personal credit, except it only tracks your business’s financial history. The rating provided by Dun & Bradstreet is most often used, expressed on a scale from 0-100. Business owners also tend to look at FICO SBSS, which is FICO Small Business Service score, specifically geared towards smaller businesses.
However, it’s important to note that your credit score will almost always be considered over the business credit. Many loans don’t even require you to have a business credit score.
Lenders don’t want to bother with a business owner who doesn’t seem like they’ll be able to repay the loan on time. Unfortunately, there’s always the risk of the borrower being unable to repay the debt to the lender when it comes to loans. Credit score plays a vital role in assuring the lender that the borrower is financially responsible enough not to make late payments or fail to make them altogether. It’s a crucial part of the small business loan underwriting process, and lenders take it seriously.
Lenders for different types of business loans tend to have slightly different credit requirements. While most of them will look for a good synergy of the conditions you meet, it’s still important to make sure your credit score is at least equal to the minimum. The higher your credit score, the better the terms of the loan, which is something you should keep in mind as well.
Banks issue SBA loans, but the US Small Business Administration acts as a partial guarantor. That makes SBA loans the most desirable and safe type of loan for small business owners. However, that makes them pretty hard to get — you’ll need a minimum of 640 credit score, and a fantastic application as well. Plenty of other businesses will compete with you for SBA loans, so you need to make sure both your credit score and your application are strong.
Bank loans have a similar credit score requirement as SBA loans. You could theoretically get one with a score of 640. However, without the US SBA to act as a guarantor, this one is a more significant risk for banks. That’s why they only loan to the candidates they deem most reliable — and a credit score of 700 and higher is very desirable.
Equipment financing loans come in handy for business owners who need to purchase equipment to run their business. The equipment is used as loan collateral, so lenders don’t risk much. A credit score of 600 is the minimum, although a higher score is always beneficial.
When determining your eligibility, the lenders will also focus on the type of equipment you’re buying. Its longevity is important, as well as your industry and whether or not the equipment has a universal use.
Short-term loans are an excellent option for business owners who are looking for amounts up to $250,000 with a 3 to 18-month repayment periods. That’s a relatively small amount, especially compared to SBA loan caps, but it also doesn’t require an as high credit score. The minimum credit score that an alternative lender will accept is 550.
Invoice financing is an interesting type of loan, as it uses a business’ invoices as collateral. As such, it depends on the success of your business, or rather your customers. In that case, your credit might not play such an important role.
It largely depends on the lender, because some of them still look at your creditworthiness to determine whether they should lend or not. In those cases, you need a minimum credit score of 600.
Your credit score is an essential part of determining your business loan eligibility. How high a score you need depends on the type of loan, the rest of your loan application, as well as the lender. With this guide, you can navigate different loan types and learn about their minimum credit score requirements.
Chris Fuller went to the University of South Florida and has worked in the financial sector for over 20 years. He has extensive experience in all aspects of personal and small business lending, from personal loans, equipment finance to cash flow based solutions for small mom and pop businesses, and large corporations.