When securing a small business loan, your credit score plays a pivotal role. Lenders use your credit score to gauge the risk of lending you money. A high credit score informs lenders that you're a reliable borrower, while a bad credit score tells them you may be high risk.

Remember that each type of small business loan — be it a line of credit, term loan or SBA loan — has its own set of credit score prerequisites. Applying for a loan without knowing these can result in a hard inquiry on your credit report, which could further lower your score.

By understanding the credit score requirements for small business loans, you're not just improving your chances of loan approval but also positioning your business for financial success. Knowing where you stand can help you make more beneficial financial decisions for your business's future.

  • Both personal and business credit scores are pivotal in securing a small business loan. A high score increases your loan approval chances and can ensure more favorable terms, such as lower interest rates.

  • Various types of small business loans have distinct credit score requirements. SBA loans generally require a credit score of 680 or higher, while merchant cash advances may accept scores of 500 to 600.

  • Strategies like paying bills before the due date, reducing credit card balances and diversifying types of credit can significantly impact your score, enhancing your loan eligibility and terms.

Why Credit Scores Matter for Small Business Loans

Lenders use your credit score as a risk assessment tool. It helps them answer a fundamental question: How likely are you to repay the amount you borrow?

When you apply for a small business loan, lenders dig into various aspects of your financial history, but your credit score often takes center stage. A high credit score signals to lenders that you have a history of managing your debts responsibly. This increases your chances of loan approval and opens the door to more favorable loan terms, such as lower interest rates.

Conversely, a low credit score can be a significant roadblock. Lenders may view you as a high-risk borrower, leading to either outright loan denial or approval with less-than-ideal terms. If you manage to secure a loan with bad credit, you'll likely face higher interest rates, more stringent repayment terms and even additional collateral requirements.

Personal Credit Score

When you're looking for small business loans, expect your personal credit score to play a significant role in the lender's decision-making process. Lenders frequently rely on your FICO score, the industry standard for credit evaluation, to gauge your reliability as a borrower. It generally ranges from 300 to 850.

Before diving into the loan application process, knowing where you stand on the FICO scale will help you prepare. Here are the categories:

  • Poor: 300 to 579
  • Fair: 580 to 669
  • Good: 670 to 739
  • Very Good: 740 to 799
  • Excellent: 800 to 850

Your FICO score isn't arbitrary; it's calculated based on specific financial behaviors. Knowing how these apply to your circumstances can help you improve your score strategically.

  • Payment history: 35%
  • Amounts owed: 30%
  • Length of credit history: 15%
  • Credit mix: 10%
  • New credit: 10%

To keep tabs on your credit score, you can access one free report from each of the three major credit bureaus — Equifax, Experian and TransUnion — annually via AnnualCreditReport.com. Many banks and financial institutions also offer free FICO score checks as a part of their customer services. Some third-party apps and websites also provide this service, but check the fine print for hidden charges.

Business Credit Score

When it comes to securing a small business loan, your business credit score is often as crucial as your personal credit score. While your personal credit score gives lenders a glimpse into your financial behavior, your business credit score offers a more focused view of your company's financial health and creditworthiness.

Several agencies measure business credit scores, including Dun & Bradstreet, Experian Business and Equifax Business. These scores generally range from 0 to 100.

The FICO Small Business Scoring Service (SBSS) is also significant to small businesses, with scores ranging from 0 to 300. It considers personal and business credit data to assess a business's credit risk. Lenders often use this score to make quick decisions on loan applications, especially for SBA loans.

Calculating a business credit score isn't a one-size-fits-all process. Various factors, including payment history with vendors and suppliers, credit utilization rate, the length of your credit history and public records like bankruptcies or liens, can influence this score.

Unlike personal credit scores, free annual reports are not a given in the business realm. However, you can purchase your score directly from credit reporting agencies. Some online platforms offer free basic reports, but a paid report is generally necessary for a more comprehensive view. Additionally, some business credit cards provide free access to your business credit score as a part of their package of services.

Minimum Credit Score Requirement by Loan Type

When you're in the market for a small business loan, it's helpful to recognize that different types of loans come with varying credit score requirements. We explore these below:

  • Line of credit: For a line of credit, lenders typically look for a credit score in the range of 650 to 700. This flexible financing option is generally more forgiving regarding credit scores, but a higher score will still secure better terms.

  • Term loan: Term loans, often used for specific, one-time expenditures, usually require a credit score of at least 680. These loans are less flexible than lines of credit but can offer larger amounts and potentially lower interest rates for borrowers with solid credit profiles.

  • SBA loan: SBA loans are among the most sought-after financing options for small businesses due to their favorable terms and low-interest rates. However, they also have stringent credit requirements. Lenders generally look for a credit score of 680 or higher, with some even requiring a score above 700.

  • Equipment loan: Equipment financing is specifically for purchasing business-related equipment. Its credit score requirement can vary widely depending on the lender and the cost of the equipment, but generally, a score of 600 to 700 is necessary.

  • Merchant cash advance: Merchant cash advances offer a way to secure funding based on your business's daily credit card sales. These are generally easier to qualify for and may accept credit scores as low as 500 to 600. However, they come with higher interest rates and shorter repayment terms.

Understanding these prerequisites can help you target the right loan product for your business, saving you time and improving your chances of approval.

How to Improve Your Credit Score Before Applying

Improving your credit score isn't just a financial goal; it's a strategic move that can open doors to better loan terms, lower interest rates and more opportunities for your business. Here are some ways to raise your credit score.

Pay bills before the due date

Making payments before the due date positively impacts your payment history, which accounts for 35% of your FICO score. Paying early or on time consistently can significantly boost your score over time.

Reduce credit card balances

High credit utilization, or carrying large balances relative to your credit limit, can negatively affect your score. Aim to keep your credit utilization below 30% to show lenders you manage credit responsibly.

Diversify types of credit

Having a mix of credit types like credit cards, retail accounts and personal loans can improve your score. This shows lenders that you can handle various forms of credit, making you a less risky borrower.

Limit new credit inquiries

Each time you apply for new credit, providers run a hard inquiry, which can lower your score. Be strategic about opening new accounts; too many inquiries in a short period can make you appear desperate for credit.

Check for errors on your credit report

Mistakes on your credit report can drag down your score. Regularly review your report and promptly dispute any inaccuracies to ensure your score accurately reflects your credit behavior.

By taking these targeted steps, you're not just improving a number but enhancing your financial profile. This can be a game-changer when securing loans or other financial products to help grow your business.

Frequently Asked Questions

Navigating the landscape of small business loans can often feel like a maze of numbers, terms and conditions. We addressed some of your frequently asked questions to give you the insights you need to make informed financial decisions.

What types of small business loans are available?
How do credit scores impact loan approval terms?
What are the typical interest rates for small business loans?
How long does the loan approval process take?
What documents do I need to apply for small business loans?
What happens if I default on the loan?

About Christopher Boston

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Christopher (Croix) Boston was the Head of Loans content at MoneyGeek, with over five years of experience researching higher education, mortgage and personal loans.

Boston has a bachelor's degree from the Seattle Pacific University. They pride themselves in using their skills and experience to create quality content that helps people save and spend efficiently.

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The content on this page is accurate as of the posting/last updated date; however, some of the rates mentioned may have changed. We recommend visiting the lender's website for the most up-to-date information available.

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