What is the Credit Score Needed for a Business Loan?
Harrison Pierce is a writer and a digital nomad, specializing in personal finance with a focus on credit cards. He is a graduate of the University of North Carolina at Chapel Hill with a major in sociology and is currently traveling the world.Read full bio
At a Glance
For most small business owners looking for a loan, the minimum credit score requirement is generally between 650-680. The higher the credit score, the better chance a business has of acquiring a loan from traditional lenders like banks. Furthermore, if you have other companies with outstanding loans with reasonable payment history, this can also help bolster your chances. In addition to having a good credit score, businesses must also be able to demonstrate they have been in operation and always pay on time ndash;both of which will help improve the likelihood of getting approved for a small business loan.
In this article, you’ll learn:
of small businesses applied for a loan last year.
Why does your credit score matter for a business loan?
Your credit score is an essential factor that lenders consider when evaluating your creditworthiness and determining whether or not to approve your business loan application. Here are some of the reasons why your credit score matters:
- It helps lenders assess your creditworthiness: Your credit score is a measure of your creditworthiness, reflecting your credit history and ability to manage credit responsibly. Lenders use your credit score to evaluate the risk of lending you money, and a higher score typically indicates a lower-risk borrower.
- It affects the interest rate you may qualify for: A higher credit score can increase your chances of getting approved for a business loan and may also help you qualify for a lower interest rate. A lower interest rate can save you money over the life of the loan and make it easier to pay off the loan on time.
- It can impact the amount you can borrow: Lenders may also consider your credit score when determining the maximum amount they will lend. A higher credit score may allow you to qualify for a larger loan amount.
- It shows your financial responsibility: A good credit score demonstrates that you have a history of making timely payments and managing your credit responsibly. This can help to build trust with lenders and make it more likely that they will approve your loan application.
Minimum credit score for a business loan
The minimum credit score required for a business loan can vary depending on the lender and the type of loan you are applying for. Different lenders have different criteria for evaluating creditworthiness, and they may consider other factors beyond your credit score, such as your business’s revenue, cash flow, and industry risk.
1. Based on the lender
As a general rule of thumb, a credit score of 680 or higher is usually considered a good credit score for small business loans. Some lenders may accept lower credit scores but charge higher interest rates and require more collateral or a personal guarantee.
It’s important to note that while a good credit score can improve your chances of getting approved for a business loan, it’s not the only factor lenders consider. To increase your chances of approval, you should also prepare a strong business plan, provide accurate financial statements, and clearly understand how you plan to use the loan funds.
2. Based on the type of loan
The minimum credit score required for a business loan can also depend on the type of loan you are applying for. Here are some general guidelines:
- SBA loans: The U.S. Small Business Administration (SBA) does not have a specific minimum credit score requirement for its loan programs. However, SBA lenders typically look for a credit score of at least 650 for most loans and a score of 680 or higher for SBA 7(a) loans.
- Bank loans: Traditional banks may require a credit score of 700 or higher for business loans. However, some banks may be willing to consider borrowers with lower credit scores if they have a strong business plan and other favorable factors.
- Online lenders: Online lenders may have more flexible credit score requirements than traditional banks. Some lenders may accept borrowers with credit scores as low as 500, although these borrowers may be charged higher interest rates and fees.
- Invoice financing: Invoice financing companies may be willing to work with businesses with lower credit scores, as outstanding invoices secure the loan. Some invoice financing companies do not have a minimum credit score requirement.
Remember that these are general guidelines, and the credit score requirements may vary depending on the lender and your specific situation. It’s essential to do your research and shop around to find the lender that best fits your needs.
Can you qualify for a business loan without the required credit score?
It is possible to qualify for a business loan even if you do not have the required credit score, but it may be more difficult and come with higher interest rates and less favorable terms. Here are a few options that may be available to you:
- Apply for a secured loan: If you have collateral to offer, such as real estate or equipment, you may qualify for a secured loan. In this case, the lender will use your collateral as security for the loan, reducing the risk and increasing your chances of getting approved.
- Look for alternative lenders: Many alternative lenders specialize in providing loans to borrowers with less-than-perfect credit. These lenders may be more willing to work with you, but they may charge higher interest rates and fees.
- Apply with a cosigner: If you have a friend or family member with a good credit score who is willing to cosign on the loan, you may be able to improve your chances of getting approved. But your cosigner will be responsible for repaying the loan if you cannot.
- Build up your credit score: If you are not in a rush to obtain a loan, you may want to focus on improving your credit score before applying for a loan. This can involve paying down debt, making on-time payments, and improving your credit history.
What is a business credit score?
A business credit score is a numerical rating that reflects the creditworthiness of a business, just as an individual credit score reflects the creditworthiness of an individual. Business credit scores are typically based on various factors, including the business’s payment history, outstanding debts, credit utilization, length of credit history, and other financial data.
Lenders and other creditors use business credit scores to evaluate the risk of extending credit to a business. A higher business credit score indicates that a business is more likely to pay its bills on time and manage credit responsibly, while a lower score may indicate a higher risk of default.
Related: How to Check Business Credit Score
Personal vs. business credit score
Personal and business credit scores are two different credit scores used to evaluate the creditworthiness of individuals and businesses, respectively.
Personal credit scores are based on an individual’s credit history and financial behavior, such as their payment history, outstanding debts, length of credit history, credit utilization, and other factors. Major credit bureaus like Equifax, Experian, and TransUnion typically provide personal credit scores. Individual credit scores range from 300 to 850, with higher scores indicating a better credit history and lower credit risk.
On the other hand, business credit scores are based on a business’s credit history and financial behavior. Credit bureaus such as Dun & Bradstreet, Experian Business, and Equifax Small Business typically provide business credit scores. Business credit scores are based on payment history, outstanding debts, credit utilization, and other financial data. Business credit scores range from 0 to 100, with higher scores indicating a lower credit risk.
Keep in mind that personal and business credit scores are calculated differently and based on different factors. While personal credit scores can be used to evaluate an individual’s creditworthiness for personal loans and credit cards, business credit scores are used to assess the creditworthiness of a business for business loans, credit cards, and other types of business credit.
Other factors considered for a business loan
Although your credit score is important, it’s not the only one. Here are four other factors you should think about before applying for a business loan.
1. Business plan
The business plan is an important factor that lenders consider when evaluating a loan application. A well-crafted business plan can demonstrate to lenders that you clearly understand your business, its industry, and its financials. It can also show that you have a plan for using the loan funds and generating revenue to repay the loan.
Here are some key elements of a strong business plan:
- Executive summary: A brief overview of your business and its goals.
- Company description: A detailed description of your business, including its products or services, target market, and competitive advantages.
- Market analysis: A thorough analysis of your industry, including market size, trends, and competitors.
- Organization and management: An overview of your business’s organizational structure, management team, and staffing needs.
- Sales and marketing strategies: A plan for how you will market and sell your products or services.
- Financial projections: A forecast of your business’s income, expenses, and cash flow, including how you plan to use the loan funds.
- Appendices: Any supporting documents, such as resumes, financial statements, and market research data.
2. Time in business
The length of time your business has been operating is another important factor that lenders consider when evaluating a loan application. Generally, lenders prefer to work with companies that have been operating for at least two years, as these businesses have a track record that can be used to evaluate their creditworthiness.
Here are some reasons why the length of time in business matters to lenders:
- Demonstrates stability: Lenders want to see that your business is stable and has a proven track record of generating revenue and profits. A company that has been operating for a longer period of time is perceived to be more stable and less risky.
- Shows ability to manage finances: Businesses that have been operating for a longer period of time have had more time to establish financial systems and processes that demonstrate their ability to manage their finances effectively.
- Provides historical financial data: A business that has been operating for a longer period of time has a longer financial track record that lenders can use to evaluate its creditworthiness. This includes information about the business’s revenue, cash flow, and profitability over time.
3. Cash flow and revenue
Cash flow and revenue are critical factors that lenders consider when evaluating a business loan application. Lenders want to ensure that your business has the financial capacity to repay the loan. Cash flow and revenue are two key indicators of a business’s ability to generate income and manage its finances.
Here’s why cash flow and revenue are important:
- Demonstrates ability to repay: Lenders want to see that your business has enough cash flow to cover its expenses and debt payments, including the loan you are applying for. A business with strong and consistent cash flow is more likely to be approved for a loan, as it can repay the debt.
- Shows financial stability: Consistent revenue and cash flow over time demonstrate that your business is financially stable and can weather unexpected expenses or downturns in the economy.
- Provides a basis for loan amount: Lenders often use your business’s cash flow and revenue to determine the maximum loan amount you qualify for. A higher cash flow and revenue can increase the maximum loan amount you are eligible for.
Assets are another important factor that lenders consider when evaluating a business loan application. Assets can provide lenders with collateral that can be used to secure the loan, which can reduce the lender’s risk and increase the likelihood of approval. Additionally, assets can demonstrate to lenders that your business has valuable resources that can be used to generate income and repay the loan.
Here are some common types of assets that lenders may consider when evaluating a loan application:
- Real estate: If your business owns real estate, such as a commercial building or office space, this can be used as collateral to secure a loan.
- Equipment: If your business owns valuable equipment, such as machinery, vehicles, or computers, this can be used as collateral to secure a loan.
- Inventory: If your business has inventory that can be sold to generate revenue, this can be considered an asset that can be used to repay the loan.
- Accounts receivable: If your business has outstanding invoices from customers, this can be used as collateral for invoice financing or accounts receivable financing.
Lenders may not consider all assets equally valuable. For example, real estate may be viewed as a more valuable asset than inventory, as it typically has a higher resale value. Additionally, the lender may assess the asset’s value to determine the loan amount that the asset can secure.
The difficulty of getting a new business loan can vary depending on several factors, including the lender, the type of loan, the business’s financial history, and the overall economic climate. Here are some factors that can impact the difficulty of getting a new business loan:
- Lender requirements: Different lenders have different requirements for business loans. Some lenders may have strict credit score requirements, while others may require a certain amount of time in business, revenue, or collateral. Some lenders may also specialize in certain types of loans, such as SBA loans or equipment financing.
- Type of loan: The type of loan you are applying for can also impact the difficulty of getting approved. For example, secured loans that require collateral may be easier to get approved for than unsecured loans that do not require collateral.
- Business financial history: Lenders will typically review the financial history of a business, including its revenue, expenses, and credit history. A business with a strong financial history may have an easier time getting approved for a loan than a business with a less established financial history.
- Economic climate: The overall economic climate can also impact the availability and difficulty of obtaining a new business loan. During economic uncertainty or recession, lenders may be more cautious about extending credit and have more stringent requirements for loan approval.
The impact of a business loan on your personal credit score can vary depending on several factors, including the type of loan, the lender, and how you manage the loan.
If you apply for a business loan and the lender requires a personal guarantee, it means that you are personally responsible for repaying the loan if your business is unable to do so. In this case, the lender may report your loan payments to the credit bureaus, which could impact your personal credit score. Late payments, defaults, or other negative activity could hurt your credit score.
However, if you apply for a business loan that does not require a personal guarantee, the loan may not show up on your personal credit report. It, therefore, would not directly impact your personal credit score. In some cases, the lender may still perform a credit check as part of the loan application process, which could result in a temporary dip in your credit score due to the inquiry. However, this impact is usually minor and temporary, and your credit score should recover over time as long as you make your loan payments on time.
Having good credit can increase your chances of getting approved for a small business loan and can also help you qualify for more favorable loan terms, such as lower interest rates and higher loan amounts. However, getting a small business loan with less-than-perfect credit is possible.
Some lenders may be more lenient in their credit requirements for certain small business loans, such as secured loans or loans backed by the Small Business Administration (SBA). These loans may be easier to qualify for, even with lower credit scores.
It’s also worth noting that even if you have a lower credit score, you can take steps to improve your chances of getting approved for a small business loan. For example, you could consider applying with a co-signer or providing collateral to secure the loan. You could also improve your credit score by paying bills on time, reducing debt, and addressing any errors or inaccuracies on your credit report.