For small business owners looking to acquire a business loan, credit scores come in two varieties: Personal credit scores and business credit scores.
You should understand how these two types of scores play a role in determining your eligibility for a loan. You will also want to better understand how to boost these scores in order to secure the best interest rates and terms.
The three main consumer reporting agencies include Equifax, TransUnion, and Experian. Dun & Bradstreet constitutes the main business credit reporting agency.
Consumers receive protections under the FCRA (Fair Credit Reporting Act) which entitles them to access their credit score and provides additional protections during the loan application process. Businesses do not receive these protections.
The two main credit scores each have their own scoring methodologies:
- Consumer Credit Scores: The most common consumer credit score, FICO 8, takes into account your personal creditworthiness and ability to pay your debts. FICO 8 scores range from 300 to 850.
- Business Credit Scores: A variant of the consumer FICO score, the FICO SBSS, takes into account business cash flow, assets, and liens or judgments. FICO SBSS scores range from 0 to 300.
Related: What are the 5 C’s of credit?
Credit Score Requirements by Loan Type
Different lenders and different loan products will all have unique credit score requirements. Some loans, such as certain SBA loan products, may have lower credit score requirements, while large conventional term loans may have significantly higher requirements.
Ultimately, a lender wants to receive an unambiguous answer to the following question: “If I loan money to this client, will they pay me back on time?” Credit scores offer a shorthand way of helping lenders answer this exact question.
Given that the average personal FICO 8 score in the United States currently sits slightly above 700, having a score anywhere below this number will lead lenders to look at your loan application with a level of skepticism.
Having a personal FICO score below 650 will make it difficult to acquire any type of business financing at all. However, you may find that there exist opportunities to boost your personal FICO score by lowering your debt burden, paying your bills on time, and increasing your personal income.
SBA Loan Credit Score Minimum
On its website, the Small Business Administration (SBA) does not directly disclose its minimum credit score requirements for its loan products. However, lenders underwriting the actual loans will make a determination based on their own credit guidelines.
In general, you should expect to need at least an average personal credit score, one around 700, in order to qualify for an SBA loan. Lenders will make their own calls as to whether or not you qualify based on your consumer and business credit scores. Each borrower’s situation will vary, however, borrowers with credit scores under 650 typically aren’t eligible for a traditional business loan. Borrowers who don’t have a good credit score may be able to obtain a short-term loan, or loan with a higher interest rate to help build credit.
Related: Do SBA loans affect personal credit?
Conventional Small Business Bank Loan Credit Score Minimum
Traditional bank loans often have tight credit score requirements in order to avoid risk on the part of the lender. Aim for at least a 700 personal FICO score if applying as a sole proprietor. As a business, you will want to aim for at least a 170 FICO SBSS score to qualify for a loan.
Higher scores will usually receive additional rewards such as lower interest rates or, in some cases, lower collateral requirements.
Other Types of Financing
For individuals or businesses with lower-than-average credit scores, alternative types of financing may offer a route to capital without the additional restrictions and eligibility requirements traditional lenders put in place to mitigate risk.
However, you will want to exercise caution in pursuing these alternative sources of financing. For individuals and businesses with bad credit, the following types of alternative lending programs may offer some assistance in securing capital:
- Invoice Factoring Credit Lines: With an invoice factoring credit line, the lender will advance you a portion of your outstanding accounts receivable upfront in exchange for fees and interest.
- Lines of Credit: A line of credit, sometimes called a revolving line of credit, is a type of loan that allows you to borrow up to a certain limit and then pay back the money over time. It’s similar to a credit card in that you can borrow as much as you need and then pay it back over time.
- Merchant Cash Advances: In general, merchant cash advances provide upfront cash in exchange for a percentage of your business’s future sales. They often carry heavy interest rates, sometimes in the triple digits on an annual basis.
- Bridge Loans: Most commonly, bridge loans act as a temporary form of financing for the purchase of fixed assets and usually carry high-interest rates given their flexibility.
- Credit Cards: In a pinch, credit cards can provide a source of high-interest-rate financing. However, this type of financing can come with serious drawbacks.
Getting an SBA Loan with Bad Credit
In general, most businesses and sole proprietors will struggle to qualify for an SBA loan without a strong consumer and business credit score.
The minimum acceptable consumer FICO for an SBA loan usually revolves around 700. The minimum FICO SBSS usually revolves around 160, but higher scores will offer owners a higher chance of qualifying.
Secured vs. Unsecured Business Loans
To qualify for a secured loan, a business owner must pledge collateral. Collateral includes personal and business assets such as real estate, vehicles, working capital, or equipment. Unsecured business loans do not require the debtor to pledge collateral.
These two types of loans often have different interest rates because the lender takes on correspondingly less risk when it has access to collateral it can seize in the event that the debtor defaults on its obligations.
How Collateral Works
Different loans will have unique collateral requirements. For example, some secured business loans require the debtor to pledge the entirety of the principal as collateral. Collateral comes in different forms, including personal property such as a private residence, personal vehicles, or business assets such as property, plant, and equipment.
SBA guidelines also describe collateral requirements for loans. 7(a) loans, one common SBA lending program, require no collateral up to $25,000, while 504 loans derive security from the underlying long-term asset.
Business Loan Interest Rates and Personal Credit Score
At the time of writing, annual interest rates for fixed-rate loans hovered between 2.5% and 7.6%. The median skewed to the left-hand side of the distribution at 2.7%. The exact interest rate depends on the applicant’s credit score, with higher credit scores receiving, on average, more favorable lending terms.
Business Loan Credit Checks
During the small business loan application process, the lender will review your personal and business financial information, including your credit history. If the lender discovers that you have previously failed to make timely payments on either personal or business obligations, then they may refuse to underwrite your requested loan or charge higher-than-average interest rates in exchange for taking the added risk of lending to you.
Upon searching for business loans without credit checks, you may discover several types of alternative lenders. Some companies offer the types of alternative financing described previously, including merchant cash advances and invoice factoring.
Silicon Valley has even gotten into the action in recent times with products that provide upfront cash in exchange for recurring payments for customers. Many software-as-a-service businesses have monthly or annual recurring revenue streams and companies that offer alternative financial services can turn these recurring payments into an upfront cash payment.
Other types of loan products that require no credit check include working capital loans from major banks and financial services companies. One company we surveyed also permitted applicants to use their 401(k) retirement accounts as collateral for a term loan.
You should consider using such products selectively – sometimes a traditional financing product with a credit check can have a much more favorable impact on your credit history than an expensive alternative product.
Increasing Your Personal Credit Score
To increase your personal credit score, you should consider taking the following steps:
- Regularly review your credit reports for discrepancies and errors such as fraud.
- Ensure you keep your credit card utilization as low as possible from month to month.
- Consider asking a friend or family member to add you as an authorized user on their credit cards.
- Avoid making several hard credit inquiries.
- Allow time for your credit accounts to age.
- Identify if you have any outstanding collections accounts. While paying down a collection account does not remove the negative item from your history, it can reduce the penalty from it.
By following these steps, you can balance the five FICO factors, including payment history, credit usage, age of credit accounts, and new credit inquiries.
Becoming Eligible for a Small Business Loan
Before you submit a business loan application, it pays to take stock of your current credit history by accessing free credit reports from the major credit bureaus such as Experian, Equifax, and TransUnion.
If applicable, you should also examine your business credit score as provided through scores such as the FICO SBSS and Dun & Bradstreet’s business credit scoring service.
To access your personal credit history, visit AnnualCreditReport.com. During the COVID-19 pandemic, the major credit reporting agencies will allow consumers to check their credit more frequently than the federally-required annual reporting period.
To access your business credit report, you can visit Dun & Bradstreet’s website to access their business scoring products. Other services may allow you to access your business credit score and history.