Your credit score plays a major role in determining your eligibility for business loans. It also dictates the type of credit you can access and the terms you’ll receive. Here’s what you need to know about qualifying for a business loan and why your credit score matters. This guide also explores the minimum credit score requirements by loan type.
Qualifying for a Business Loan
When you’re a small business owner looking to secure a business loan, your credit score will play a crucial role in the process. There is no one-size-fits-all minimum credit score for all business loans, as different lenders have varying requirements. However, having a good personal credit score (typically 690 or higher) or an excellent business credit score can greatly improve your chances of being approved for a loan.
To increase your chances of securing a loan, first get a feel for the general eligibility guidelines that come with each type of loan. For instance, government-backed Small Business Administration (SBA) loans and traditional business bank loans often require higher credit scores. In contrast, short-term loans, business lines of credit, or merchant cash advances often have lower minimum credit score thresholds.
In some cases, if your credit score isn’t quite up to par with a specific lender’s requirements, you can still pursue other options. For example, you might explore alternative lending sources or improve your credit score by paying down your outstanding debt or fixing inaccuracies in your credit report.
Remember, each lender assesses credit scores differently, so it’s important to research and compare loan options catering to business owners with similar credit scores. The key to securing a favorable business loan is maintaining a healthy credit score and providing the necessary documentation to demonstrate your business’s financial stability.
Personal Credit Score vs. Business Credit Score
Personal credit scores and business credit scores are two separate but related figures that lenders use to gauge your creditworthiness.
Your personal credit score is a numerical representation of your financial history and creditworthiness as an individual. It considers factors like your payment history, outstanding debt, length of credit history, credit mix and recent credit inquiries. It ranges from 300 to 850 – the higher, the better.
Your business credit score reflects your company’s creditworthiness and financial health. It considers your company’s payment history with suppliers and lenders, outstanding debts, company size, industry risk, and public records like bankruptcies or liens. The most common business credit scores typically range from 0 to 100, except for FICO, which is between 0 and 300.
When looking to get a business loan, some lenders may consider your personal and business credit scores. This is especially true for small business owners or new businesses where the individual’s credit rating is seen as a reflection of the company’s creditworthiness. The minimum required credit score for a business loan can vary from lender to lender, but having a solid personal credit score can help improve your approval odds.
To maintain a healthy credit profile for yourself and your business, focus on timely payments. Also, minimize your debt load and monitor your credit report for any errors or discrepancies.
Why Lenders Use Credit Scores as a Requirement
Lenders use credit scores as a requirement because it helps them evaluate the creditworthiness of borrowers. Essentially, it’s a way for the lender to determine the likelihood of timely repayments on the loan.
Your personal credit score is an indicator of your financial history. A high score implies that you have managed your debts responsibly in the past, making lenders more confident in granting you a loan. However, a low credit score might indicate that you have had difficulty paying off previous debts or have defaulted on loans. In such cases, lenders might be hesitant to lend money to you or approve you for a business loan with less favorable terms.
Lenders may also check your business credit score if you have an established company. A strong business credit score demonstrates your ability to manage business finances, pay suppliers on time and fulfill other financial obligations. This further increases your chances of securing a business loan with favorable terms.
What Credit Score Do You Need for A Business Loan?
It varies by financial institution and the type of funding you’re seeking. Still, a higher credit score increases your chances of getting a loan with more favorable terms.
You’ll generally need a good personal credit score of around 690 or higher to qualify for government-backed SBA loans or traditional bank loans. However, some lenders may have lower credit score requirements.
If your credit score is 700 or above, you can expect almost any business loan option to be available. An excellent credit score of 750 or higher will offer even more opportunities for loans with better terms and interest rates.
Remember that your credit score isn’t the only factor lenders consider when evaluating your business loan application. They also assess aspects like your business’s financial performance, cash flow and debt-to-income ratio.
A lower credit score doesn’t mean you won’t have access to business funding opportunities. There are alternative financing options, such as peer-to-peer lending or crowdfunding. That said, working on improving your credit score before applying for loans can help you qualify for business loans with attractive terms.
Minimum Credit Score Requirement Per Loan Type
Below is the minimum credit score requirement by loan type:
Business Bank Loans
A credit score of 700 or higher puts most traditional business loan options on the table. For those seeking exceptional loan terms, a credit score of 750 or above is ideal.
SBA Loans
For SBA loans, a credit score of around 680 is required. Lenders view scores in this range as good, giving you access to most lending products.
Short-term Loans
Some online lenders may approve you for funding with a credit score as low as 500. However, having a credit score of at least 670 is considered good and boosts your approval odds.
Business Lines of Credit
In the case of business lines of credit, a higher credit score opens up more funding opportunities. A credit score of 700 or more is recommended to obtain the most favorable terms and interest rates for lines of credit.
Merchant Cash Advances
A merchant cash advance typically has more relaxed credit score requirements than other types of loans. While it’s not uncommon to see approvals for businesses with scores below 580, maintaining a credit score of at least 500 to 670 helps increase your chances of securing funding.
Other Things You Should Know When Qualifying for a Business Loan
It’s important to know your credit score before applying for a business loan. Here are some other important factors to keep in mind:
Knowing Where Your Business Stands is Key
Before you consider applying for a business loan, get a clear understanding of your company’s financials. Analyzing your cash flow, balance sheets and revenue projections will allow you to identify where your business stands. You’ll also understand what type of loan or lines of credit best suit your company’s needs.
Preparing for Your Application is Essential
To impress potential lenders, it’s vital to have a well-prepared and detailed business plan. Include accurate and updated information about your company, financial projections and market analysis. Ensure you gather all necessary documentation that may be required by the lender during the loan application process in advance.
Credit Score Requirements Also Vary By Lender
While some business loan providers may consider a credit score between 640 and 700 acceptable, requirements can differ among lenders. For example, traditional lenders such as banks might have stricter credit score criteria. In contrast, alternative lenders or Small Business Administration (SBA) loans may have more lenient requirements.
Improving Your Credit Score Increases Your Chances
Boosting your credit score increases the likelihood of securing a loan with lower interest rates and better terms. Maintaining timely payments on existing obligations, reducing outstanding debts, and regularly monitoring your credit reports for errors are ways you can improve your credit score.
Consider signing up for a free Experian account. You can view your credit report, score and learn more about ways to improve your credit score.
Developing Good Relationships with Your Lender
Establishing trust and communication with potential lenders is crucial when securing a small business loan. Presenting a well-prepared business plan, supplying accurate information and keeping lines of communication open with your lender will help ensure a smoother loan application process and a greater chance of approval.
