The Business Loan Credit Score Guide
Lending decisions are made on the basis of an entire loan application. A business plan, cash flow, revenues, and growth will all be weighed during the underwriting process. Within your loan application package, some pieces carry more weight than others. Do not underestimate the importance of a personal credit score within your loan application.
A credit score is seen as a measurement of risk. It reflects how good you are at managing your money and repaying your debts. Actions such as consistently making payments late and hard pulls of your credit score reduce the number, whereas maintaining a low debt ratio on credit cards and repaying loans in full push it upwards. To a lender, risk is the possibility that you will not repay their loan. They look at these scores to determine your trustworthiness.
A personal credit score reflects the activities of your personal life, such as buying a car or a house. An on-time payment history, the length of your credit history, the number of your credit accounts, and any tax liens, judgments or bankruptcies are all input into the score’s calculation. If you are younger and just starting out, simply having a short credit history and fewer open credit accounts could lead to a lower score, and you might need to wait several years for it to build up before applying for a business loan.
Your business credit score or Paydex score is a credit score for your business. You can build a business credit score by opening bank accounts and credit cards in the business’ name and using them solely for business purposes. While it can be advantageous to build a good business credit score, most lenders outside of credit card and insurance companies will pull your personal FICO score to determine if you are an eligible borrower.
What Types of Business Loans are Available
If you do not know your credit score, the three major credit bureaus, TransUnion, Equifax, and Experian, are required to give you one free credit report a year. Contact them and request your score. While credit score tiers vary somewhat between lenders, generally speaking, scores for the following types of business loans are broken down as follows:
|Type of Loan and Lender||Minimum Score Required|
|Traditional Banks Term Loans||700+|
|Alternative Lenders Short-Term Loans||600+|
|Merchant Cash Advance||500+|
|Bad Credit Business Loans||500+|
Given the importance of your credit score, as a small business owner, you should be aware of credit score ranges and how they impact your ability to access capital.
Good Credit Lending
When applying for a business loan, good credit is considered to be a personal FICO score within 700-850. People with scores in this range will have access to the most funding options and best interest rates. Traditional lenders such as banks typically only work with borrowers who have credit scores above 700. With a good credit score, it would be much easier for you to take out a bank business loan, either short-term or long-term.
Business owners who qualify for SBA loans can have a lower credit score of 640+ because the government partially guarantees their loan. However, these loans have stringent requirements and can take longer for approval.
If the rest of your loan application was not as strong as it could be, and that led to a traditional lender denying your loan application, you might have to work with an alternative lender. With a score of 700-850, you would have access to an alternative lender’s best unsecured rates as well as low-interest credit cards.
What is Mid-Range Credit?
The band between a credit score of 600-700 can sometimes qualify for traditional lending, depending on the type of loan but scores would have to be towards the highest end and there would still be a premium on the loan if it was at all possible.
Another possibility for securing more traditional lending in this credit score range is an equipment financing loan, where the lender would have collateral to offset their risk. Also, invoice financing loans secured by accounts receivables can be a good option because lenders will not care if you have a mid-range score if the underlying credit of the businesses who owe you money is high enough.
For the most part, the 600-700 FICO range is well suited for alternative types of lending, in fact, depending on some other business details in the application, this credit score range can lead to some of the better rate packages they offer. Online alternative lenders will grant short term business loans at some of the best rates if the accompanying business’ bank financials are healthy. There are also some moderate interest rate credit cards available if your score falls within this range.
If you wanted a personal loan for business use and you are in this credit range then some peer-to-peer lenders might work with you. A peer-to-peer lender is another individual or business with excess cash that they wish to invest. They will lend through a central marketplace to borrowers that are in the higher 600’s credit score range, and peer lending can be a moderately priced loan if you are willing to take it out personally and not under a business.
However, if your score is near the top of the range, closer to 700, it would be worth your time and effort to try to bring it up over that point before applying for a loan because that is where you will get the best rates for a business loan.
Bad Credit Lending
If your credit score falls below 600 and is within the range of 500-600 range you will not be able to work with traditional lenders and there are very few possible credit cards that are not secured. Your only business funding options will be high-interest alternative lenders, who will likely extend credit in the form of merchant cash advances or bad credit business loans.
Working with an alternative lender has some advantages over a traditional lender. Their application process is often simpler, and they approve and disburse funds much more quickly. If your business has high revenue streams, frequent and large deposits, and you have been in business for several years, you will qualify for lower rates and larger approval amounts.
But keep in mind that with any type of lending your credit scores still matters. The lower the score, the higher the interest rates that you will pay.
What is a Good Credit Application?
A credit application which is good overall begins with a very high credit score. It is not only a credit score though that gets an approval. Most banks want to see two years of business financials, a minimum of two years in business, and good profits. If your score falls just below 700, but your company has strong cash flow and high profits, those factors could offset your credit score but it not likely in any of the larger banks.
Other elements of a good credit application include collateral to secure the loan. Also, if you carry a low amount of current debt and have low debt utilization ratios lenders will look at you more favorably because you are actually sitting on credit. It is important to note that sometimes your business’ industry can sway a lender for or against your loan application, even with good credit and great business financials. Although a good credit score is important when trying to secure funding, be sure to know where you stand on all elements in your credit application.
Take an honest look at every credit factor in your loan application and identify areas of potential improvement before submitting it to increase your odds of approval.
What is a Bad Credit Application?
A bad borrower will find it almost impossible to obtain capital. If you have a low credit score combined with low business revenues and very few monthly deposits most lenders will be unwilling to work with you. In this situation, if there is no room for credit score improvement, a good strategy would be to improve the revenues and deposits of the business bank account. With good business bank account activity even the poorest credit scores can secure funding with a bad credit business loan.
A robust loan application will increase your odds of being approved for a business loan, but your credit score is an extremely important piece in that puzzle. Small business owners should monitor their credit score to maintain high scores as well as find improvement possibilities along the way if a credit score has room for growth.