SBA loans and other types of small business loans can affect your personal credit under specific circumstances.
For instance, if you have pledged personal collateral such as a private residence or vehicle to secure a business loan, then defaulting on the loan will result in a hit to your personal credit and the loss of your pledged collateral. The credit reporting agencies will keep a record of these activities as well.
Corporate structures also determine whether your personal credit will decline as a result of default. C corporations and other liability-limiting entities may provide protection to the owner in some cases for businesses of a certain size. Sole proprietors will always have their personal credit on the line in the process of acquiring a small business loan.
Hard vs. Soft Credit Checks
When acquiring a small business loan, lenders may conduct both a soft credit check and a hard credit check. A soft inquiry does not affect your personal credit score while a hard inquiry can.
Typically, you might encounter a soft inquiry when checking your own credit, when a lender you currently work with checks your credit, or during a pre-approval marketing process.
A hard inquiry, on the other hand, comes into play when a lender makes a definitive lending decision. In some cases, a hard inquiry could lower your credit score if too many have occurred in a similar time frame.
Are SBA Loans Reported to the 3 Major Credit Bureaus?
Yes, lenders will provide information to the major credit bureaus, including Experian, Equifax, and TransUnion, about your loan status. These agencies collect additional information about you, including your payment history, judgments, tax liens, lawsuits, and collections based on your personal social security number or your business’s tax ID.
You should also familiarize yourself with the Fair Credit Reporting Act (FCRA). The FCRA acts as the legal framework which determines how the credit reporting agencies may conduct themselves. While consumers have broad protections under the FCRA, businesses do not. You may acquire your personal credit score for free from all three agencies by completing the form on this website.
In addition to the major consumer credit bureaus, Dun & Bradstreet also functions as a business credit reporting agency. Business credit reporting agencies also build a business credit report for active businesses.
What Minimum Credit Score Is Required for an SBA Loan?
While lenders will not necessarily have a specific FICO cut-off in all cases (or, at least not one that they will tell you about), you can count on them to analyze each and every aspect of your personal financial history, including previous judgments, ability to make payments on time, and your income. In general, a borrower with a score of under 650 will typically have a harder time getting a business loan approved.
Lenders may also examine your existing personal debt-to-income ratio by including mortgage payments and personal credit card spending in their calculations. Cleaning up your personal credit history presents a good opportunity to help bolster your ability to acquire an SBA loan.
How Can I Improve My Chances of Receiving an SBA Loan?
The SBA has two layers of eligibility requirements for receiving financing through their guaranteed loan programs, including:
– Eligibility Requirements: Businesses must meet certain size requirements, act as a for-profit business, do business in the United States, owners must have personally invested into the business (usually 15%-25% of the total loan), and owners must have exhausted all other financing options.
– Discretionary Requirements: Assuming your business has met the minimum eligibility requirements for an SBA loan, you must then meet the lender’s requirements based on a personal credit score such as FICO as well as a business credit score such as FICO SBSS.
Can I Buy a House with an SBA Loan?
In short, no. You may not use an SBA loan to purchase a private residence or to invest in speculative residential real estate to become a landlord.
However, while the SBA forbids investments in residential real estate, business owners can invest in other types of real estate and land with the 504 loan program, including existing commercial or industrial buildings, new facilities, or long-term property, plant, and equipment (PP&E). While an SBA loan can be used for investment property, the owner must have a business that occupies 51% or more of the available space.
The SBA also permits business owners to modernize or upgrade existing buildings, land, streets, utilities, parking lots, and landscaping with a 504 loan.
Additional restrictions on 504 loans include the inability of businesses to use the proceeds to invest in working capital such as inventory or to refinance existing debt.
What about Building Business Credit?
The principal measure of your business creditworthiness, the FICO SBSS (Small Business Scoring Service), considers additional factors beyond your personal financial situation, including:
- The debt-to-equity ratio of the business: The more debt your business takes on, the riskier lenders will view your ability to repay the loan through free cash flow.
- Free cash flow available after operational expenses: Lenders will view businesses with significant free cash flow available after paying all operational expenses more favorably than those which struggle to generate substantial cash flow.
- History of timely payments to suppliers and lenders: If your business has a successful track record of making payments on time to lenders and suppliers, then your SBSS score will increase in most cases.
In most cases, a small sole proprietorship with minimal assets and liabilities will not necessarily produce a FICO SBSS score that gives lenders additional information beyond a standard consumer-oriented FICO score.
If your business has grown in its revenues over time or has accumulated significant assets and liabilities, then an SBSS score may be more helpful to lenders. It can also come into play as a result of making timely business loan payments.
Unfortunately, because businesses do not receive coverage under the Fair Credit Reporting Act (FCRA), your loan application could receive a denial without lenders disclosing the exact SBSS score used to make that decision.
SBA Loan Next Steps
To learn more about SBA guaranteed loans and different types of business loans, check out our page on Finding the Money to Start a Business.