Many people wonder how their personal credit score will affect their application for a small business loan. Lenders specify a whole host of different criteria, which change depending on the specific product. Nine times out of ten, the lender will at least check your credit score; this is because your credit file is a significant factor in the underwriting process, as it helps the lender assess how reliable the borrower is. The higher the credit score, the more trustworthy the borrower, and therefore, the more likely they are to be approved.
Every lender will have different minimum requirements when it comes to your credit score. In some cases, a low score can shut you off from entire institutions or products. However, technically speaking, there is no minimum credit score for loan eligibility. So, if you’re wondering if you can get a business loan with a 700 credit score – which is approximately the American average – the short answer is yes. However, there are some nuances and caveats. Here, we explore this subject in more detail.
Your credit score: The basics
Before diving into how credit scores affect loan applications, we’ll lay down the foundations. If you’re a small business owner, you’ll have two types of credit file – your personal credit score and your business credit score. Here’s the difference:
Personal credit score
Your personal score is the credit rating you’re probably most familiar with. Otherwise known as your FICO credit score, credit bureaus calculate your score using an analytical system developed by the Fair Isaac Co. There are other systems out there, but FICO is the most common. However, the three main credit bureaus (Experian, Equifax and TransUnion) have their own variation of the algorithm, so your score may vary from agency to agency – but not dramatically.
This algorithm weighs up several factors to calculate how likely you are to be able to pay back the loan. Although consumers don’t know exactly which variables they take into account, an educated guess would include:
* Payment history
* Length of credit history
* Amount of credit
* Tax liens, judgments, or bankruptcies
* Credit inquiries
* Credit card usage
After weighing up these factors, the system will produce a score, which generally ranges between 300 and 850. The higher your score, the more creditworthy you are.
Business credit score
Your business credit score operates very similarly to your personal credit score. In essence, it is a measure of the fiscal reliability of your business. Dun & Bradstreet is the largest and most popular business credit bureau. Through a similar method to personal credit scores, they’ll allocate you a rating between 1–100, 1 being very poor and 100 being perfect. These calculations take into account all the same factors as a personal score, plus business size, industry risk factor, and your relationships within the supply chain.
However, your business credit score won’t always be required if you’re applying for small business funding. Generally, lenders will privilege your personal credit score over your business score – and some won’t even request your business score at all. However, if you’re applying for an SBA-backed program or a long-term loan from a bank, it’s likely they’ll take a look at both.
Why does my credit history matter so much?
As touched on in the introduction, a credit score is a tool lenders use to assess risk – which essentially means whether or not the borrower will be able to repay the debt. So, for example, a lender might deem an applicant to be risky because their payment history suggests they can’t keep up with bills or loan repayments. This is precisely what a credit score is – a prediction of your fiscal responsibility. Lenders will make assumptions based on your personal financial history and apply them to your business – the logic being that if you can’t keep your personal financials in check, it’s unlikely your business behaviors are going to be much better.
However, every loan application is evaluated on an individual basis, and there will be a combination of factors that the lender will take into account. These other factors will include revenue, time in business, and projections. Nonetheless, there should be a minimum personal credit score you should shoot for to be eligible for most different types of business funding. Generally, it shouldn’t be lower than 550 – but always check the lender or product’s specific requirements before making an application. This is because failed applications can damage your credit score, making further attempts more challenging.
What you can get with a 700+ FICO score
It’s important to understand your credit score, but you know what’s even better? Knowing what you can do with it. Below is a quick rundown of what financial products small business owners can get with a 700+ score.
New business owners often find it difficult to get funding. This is because most new ventures need capital to kickstart growth, but they have no track record when it comes to business performance. Therefore, if you’re applying for startup funding, the lender is going to scrutinize your personal credit score. With a respectable score like 700, you’ll have a few options, since your score shows you’re a responsible borrower. Although some lenders will insist on a minimum time in business, many banks and SBA-backed programs will extend to new businesses providing your personal credit score is strong.
Furthermore, if you’re considering seeking out equity financing, it’s likely that investors or venture capitalists will also be interested in your credit score. This will indicate your trustworthiness, reliability, and fiscal responsibility. This will give investors confidence in your ability to generate a return. Either way, a good credit score like 700+ gives you the flexibility to choose a funding solution that will help your business grow in the lean years.
Bank loans (SBA or otherwise)
For most small business owners, conventional bank loans and SBA-backed programs are the best route to funding. These programs come with low interest rates, low fees, and lengthy repayment terms. Furthermore, if the program is backed by the SBA, the debt is guaranteed, which makes the lender less averse to risk. However, as you might have guessed, these products come with stringent requirements – but the good news is that if your credit score is over 700, you have a good chance of qualifying. That said – and we can’t stress this enough – check the lender’s individual requirements before making your application.
If your credit score isn’t as good as you’d like, don’t worry – there are thousands of other Americans like you. What’s more, just because you have a low score now, doesn’t mean you can’t recover. The first step is to pay off your existing debt and set up a system to make sure you pay your bills on time every month. Plus, if you don’t have a high enough score to qualify for the ideal product right now, there are other options. For example, many online lenders will have more lenient credit score requirements or place greater emphasis on business performance. Although it’s essential to stay on top of the repayments and interest, these products are a great way to build a robust financial history and boost your credit score.