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The process of getting a small-business loan is generally a bit complicated. Loan requirements vary depending on the loan product you want and the lender you work with. However, a minimum credit score is almost always a factor in determining eligibility for a business loan.
Credit scores are a way to assess a borrower’s creditworthiness and the lender’s risk in offering a loan to a borrower. Business owners with lower credit scores might have a tougher time securing the loans they want — or might be shut out of certain loan types entirely.
With that in mind, let's explore the different credit scores needed for business loans.
Minimum credit score for business loans
There is no universal credit score minimum requirement for all business loans. But although there are some loans with no credit check requirements, the vast majority of lenders will take your credit score into consideration when deciding whether to work with you.
Put simply, the stronger your personal credit score, the easier it will be to get a business loan. And your credit score doesn't only determine your eligibility for a given business loan, it also determines the terms that your business loan will ultimately come with, such as loan amount, APR, repayment schedules, etc.
Of course, your other credentials — like how long you've been in business, your annual revenue and your business credit score — might affect your business loan options and terms, but your personal credit score will often be the biggest factor in determining your funding search. Here's a breakdown of the type of financing you'll likely qualify for depending on your credit score:
700 or above: Credit scores of 700 or more will put just about any business loan option on the table. An excellent credit score (750 or higher) opens up business loan options like traditional bank loans, bank business lines of credit and SBA loans. Even more, you'll be able to access the lowest available APRs within these already affordable types of business loans. If your credit score falls within the 700 to 749 range, you'll still be eligible for some of the best business loans out there, like bank loans and SBA loans. That said, you'll also need to come to the table with stronger business credentials to access the best terms.
640 to 700: Business loan providers generally consider a credit score that falls somewhere between 640 and 700 to be good but not excellent. Generally, the minimum credit score for SBA and term loans is around 680. If you're on the lower end of this spectrum, you'll likely need very strong business credentials to qualify, such as several years in business or significant annual revenue. If your personal credit score is closer to 640 than to 699, you should consider looking into alternative lending options for your business funding needs. Medium-term loans and equipment financing from alternative lenders will be a top option for this credit score range.
600 to 640: A sub-640 personal credit score will mean that you're ineligible for most bank business loans. SBA loans will also be difficult to qualify for, even if your other business credentials are stellar. Nonetheless, you'll still have solid business loan options with a credit score above 600. If you have solid business credentials, equipment financing or medium-term alternative lenders will be good options. If your business is newer and/or lower-volume, then short-term loans and invoice financing will be your best funding sources.
550 to 600: A personal credit score below 600 but above 550 might make it difficult to qualify for the most affordable alternative lending options. Unless you have a long-established, high-volume and profitable business, most medium-term or equipment financing lenders won't be willing to lend to you. You're still eligible for many invoice financing companies and merchant cash advance companies, though.
550 or below: A credit score of 550 or below is lower than many lenders' minimum credit requirements. As a result, your business loan options will be seriously limited by your personal credit. Check out invoice financing companies, as some of them won't take your personal credit into account. Merchant cash advances will also be an option for those with struggling credit, although they often come with sky-high APRs.
With these ranges in mind, you may also be curious about how they apply more specifically to some of the most common types of business loans.
Credit score for SBA loans
Depending on the loan candidate and the loan program, the SBA can offer the highest capital (into the millions), the lowest interest rates (single digits) and the longest repayment periods (decades) on the market. They’re extremely desirable, which means you’ll be competing with a lot of other small business owners for those great terms.
Although the SBA really aims to provide opportunities to lots of different types of business owners and doesn’t require a certain credit score, realistically, you want to come in as strong as you can. You'll want to shoot for a score of at least 680, if you're applying for an SBA loan, while also having exceptional credentials in all other areas of your business.
Credit score for bank loans
Like SBA loans, term loans from traditional lending institutions like local banks, commercial banks and credit unions tend to carry the most desirable terms. The most eligible borrowers might be able to fetch hundreds of thousands of dollars in capital (or millions, if you’re talking commercial banks). They also offer long repayment periods and low interest rates.
As you might expect, only the borrowers that the bank underwriters deem the most reliable will be accepted: Think many years in business, high annual revenue, steady profitability and, of course, an excellent credit score. In reality, you’ll really want to be coming in at the low 700s here at minimum, although high 600s may be considered as well.
Credit score for equipment financing
If you need money to purchase vehicles, machinery, computers or any other equipment needed to run your business, equipment financing might be the way to go. It’s a collateralized loan, which means the lenders can seize and sell that equipment in case the borrower fails to repay their loan.
Because they’re guaranteed collateral, lenders aren’t taking on quite as much risk in extending equipment loans. That’s good news for borrowers with lower credit scores. A credit score of 630 may be enough to secure this type of financing. The rest of your loan terms will depend on the actual equipment you’re looking to finance — how long it’ll last, what industry it’s for and how universal its use is.
Credit score for short-term loans
Short-term loans from alternative lenders are a great option for a lot of borrowers that need faster turnaround time on financing. Online platforms have streamlined the application process, sped up the time to funding and, for the most part, eased eligibility requirements for short-term loans.
With short-term loans, capital amounts tend to cap at $250,000 and repayment periods range between three to 18 months. Compared to the millions of dollars in capital and decades-long repayment periods that the SBA can offer (to its most eligible candidates, of course), short-term loans from alternative lenders pose a lower risk.
Generally, you’ll have a shot at securing a short-term loan from an alternative lender with a minimum credit score of 600. But, as a rule, the lower your credit score, the higher your interest rates will be.
Why credit scores matter when applying for a business loan
With all of this information in mind, you may be wondering why your credit score — especially your personal credit score — is so important when applying for business loans in the first place. During the small business loan underwriting process, underwriters evaluate risk to the lender — meaning the possibility that the borrower will not repay their debt. Several factors can signal potential risk: a business is too new or revenue is too low, for example. So, how does your credit score come into play?
Your credit score is a historical measurement of your financial responsibility. So, if you were unable to repay your personal debts on time in the past, it’s a reasonable bet that you’re not going to pay off your business’s debts on time, either.
On the other hand, if your personal financial history is mostly free of faults (like tax liens, bankruptcies and judgments), then there’s a good chance you’ll stay on top of your business’s financials, too. Of course, you may also have a business credit score. While lenders typically put more emphasis on personal credit scores, having strong personal and business credit scores will only help you qualify for the most affordable financing options (SBA and bank loans). Let's explore what goes into both personal and business credit scores so you can understand how to best set your business up for success.
Personal credit score
When you hear the words “credit score,” you’re probably thinking about your personal credit score. For the most part, that’s what lenders are thinking about too. And that’s because it’s one of the best indications of your fiscal responsibility.
About your FICO score: There are three major credit bureaus that each calculate your personal credit score: Equifax, TransUnion and Experian. And the number they give you doesn’t come from thin air. Rather, it’s pretty unified. The most common method of evaluating credit is with the FICO score, which comprises a few different factors in your credit profile to come up with a number.
Each credit bureau uses its own FICO algorithm to come to a number. And that means they might all weigh those factors differently. It also means that your credit score might alter slightly (think a 20-point difference) across all three of these bureaus.
While each algorithm weighs credit activity differently (and no credit bureau will share exactly how they calculate their scores), your score is impacted by:
Length of credit history.
Personal credit scores usually range between 300 and 850. As mentioned above, you'll likely need a credit score of at least 550 to qualify for the most lenient financing options—namely, short-term financing and merchant cash advances. Because they assume greater risk, these financing options are much more expensive for the borrower than more traditional financing options.
You're entitled to one free credit report per year from each of the main credit reporting bureaus. If you find that your personal credit score is lacking, there are steps you can take to improve it.
Business credit score
Like your personal credit score, your business credit score is a measure of your historical reliability with your financial commitments. But your business credit report, as you might guess, specifically tracks your business’s financial history.
Equifax, Experian and Dun & Bradstreet all measure business credit scores, but Dun & Bradstreet is the largest and most popular agency. They’ll calculate your number on a scale from one to 100.
You also might encounter something called a FICO SBSS (Small Business Scoring Service) score. As its name suggests, the FICO SBSS score is particular to small businesses. It won’t be a necessary component of every business loan application, but you definitely need it if you’re applying for an SBA loan. Your FICO SBSS score will land somewhere between zero and 300.
About your business credit score: This is similar to your personal credit score, but the bureau will also consider things like the size of your company, your industry’s risk factors and relationships with vendors. And they’re mostly calculated according to public documents—as opposed to personal credit scores which are determined based on private information.
If you don’t have a business credit score, don’t worry too much. The vast majority of small business loan applications will consider your personal credit score over your business credit score, and most don’t require a business credit score at all. You’ll really only need to provide a business credit score if you’re applying for an SBA loan or a term loan from a bank.
However, you can also take action to improve your business credit score as well.
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This article originally appeared on Fundera, a subsidiary of NerdWallet.