The process of qualifying for a business loan involves many requirements that change based on the loan product you want. Among many factors, the credit score for loan eligibility is an important factor. A credit score is the most crucial factor in the loan underwriting process since it helps lenders determine your eligibility and your creditworthiness.
According to FICO, a FICO® credit score comprises of these five factors.
- Payment history: 35%
- Amount of debt owed: 30%
- Age of credit history: 15%
- New lines of credit: 10%
- Credit mix: 10%
For the majority of loan products, the lender will partly check your credit score. If you have a good credit score, you’re more creditworthy and pose less risk to the lender. On the contrary, borrowers with poor or bad credit score often find it hard to secure business loans—or be block out of certain loan types completely.
For every lender and loan type, the requirement of minimum credit score is different. Before jumping into the business loan application, make sure to review the minimum credit scores requirements for the loan type you’re applying for—or at least the ranges they’re in.
Is There a Minimum Credit Score to Qualify for a Business Loan?
Technically, there’s no minimum credit score requirement to qualify for a business loan. However, lenders prefer to review credit scores for certain loan types. Every business loan application is calculated separately, and the decision is made based on different combination of factors.
If borrowers other credentials confirmed or exceed the lender’s approval criteria—like annual business revenue or time in business—then there is a minimum credit score a borrower just have in order to qualify for different business loan types.
The More The Better
To summarize, the stronger your credit score is, the easier you’ll be approved for a business loan. However, credit score is not the only factor that determines a borrower eligibility for a given business loan. It also conclude other factors like loan amounts, loan terms, interest rates, and repayment schedules.
Certainly, a borrower other credentials will also affect business loan terms and options, but your personal credit score is the major factor in concluding your search for funding.
Credit Score Ranges
Here is an overview of the credit score ranges:
- 750+ Credit Score
A vast majority of lenders will be willing to work with you if you have an excellent credit score of 750 or higher. With an excellent credit score, you can access many business loan options like traditional bank loans, business lines of credit, and SBA loans with lower APRs and flexible terms.
- 700+ Credit Score
A credit score of 700 is still considered solid and if you’re under the range of 700 to 749, you’ll have access to best business loan options including bank loans and SBA loans. Accordingly, you’ll need solid business credentials to secure the best loan terms.
- 640+ Credit Score
A credit score of 640+ is considered a good score. With a sub-700 credit score, qualifying for traditional loans and SBA loans can be difficult. However, you can still qualify for other funding options like Medium-term loans and equipment financing. With a personal credit of 640 to 699, you’re eligible for most bank and SBA lenders, but need solid business credentials to qualify.
- 600+ Credit Score
With a 600+ credit score, you’re also eligible for solid business loan options. With a sub-640 personal credit score, qualifying for bank loans and SBA loan can be difficult. With solid business credentials, you can easily qualify for equipment financing or medium-term loans from alternative lenders. For startups or for businesses with lower-volume, short-term loans and invoice factoring are the most suitable financing options.
- 550+ Credit Score
If your personal credit score is below 600 but above 550, qualifying for the most affordable alternative loan options can be difficult. Except you have a long time in business, high-volume, and profitability, most medium-term lenders or equipment financing lenders will be reluctant to lend to you. A merchant cash advance and invoice financing are suitable options for this credit range.
- Credit Score of 550 or Below
A credit score of 550 or below is considered the minimum credit score requirement for many lenders. If your personal credit score is 550 or below, your access to business loan options will be limited. Merchant cash advance and invoice-financing companies will be an option for you, although they charge you high APR’s.
The Basics of Credit Scores
There are two types of credit scores: a personal credit score and a business credit score. These two credit score types are often independent and measure different things.
- Your Personal Credit Score
For many, credit score means a personal credit score. A personal credit score is the best indicator of your financial responsibility. Your personal credit score is calculated by three major credit bureaus: Equifax, TransUnion, and Experian. The credit score assigned is pretty unified and evaluated with the FICO score, which makes up a few different factors in your credit profile to come to a number. The personal credit score ranges from 300 to 850 and a credit score of 550 is essential in order to qualify for most types of business loan.
The likely factors involved in the FICO score calculations are:
- Payment history
- Credit Volume
- Length of credit history
- Number of credit accounts
- Tax liens, judgments, bankruptcies, collections
- Hard credit inquiries
- Card utilization
- Your Business Credit Score
Similar to a personal credit score, a business credit score is a measure of your past dependability with your business financial obligations. All major credit bureaus calculate business credit score and Dun & Bradstreet is the largest and most popular agency that calculate credit score on a scale from 1-100.
The FICO SBSS (FICO Small Business Service) score is specific to small businesses being it an important element of SBA loan application. The FICO SBSS is like a personal credit score, but the credit agencies also consider other factors like your company size, industry’s risk factors, and vendor’s relationships. This score is calculated based on public documents and not on personal information.
If you don’t have a business credit score, it doesn’t mean you can’t qualify for a business loan. Most lenders consider personal credit score over business credit score to evaluate loan applications, and some even don’t require a business credit score at all. A business credit score is vital for SBA loans, and bank term loans.
Credit Scores Requirements for Different Types of Business Loans
Every lender and loan type have different credit score requirements and lenders emphasize on credit score during the loan underwriting process. Some loan types require a high credit score while others don’t. If you’re fulfilling the minimum credit score requirement, your other business credentials need to balance out that minimum credit score.
Here is an overview of the minimum credit score requirements for different types of business loans:
- 640+ Credit Score for SBA Loans
SBA loans are the most popular loan types among small businesses. These loans are provided by banks and online lenders and are partially guaranteed by the US Small Business Administration (SBA). Based on the loan program and borrower creditworthiness, the SBA can offer the larger loan amounts, the lowest interest rates, and the longer repayment terms. But getting SBA loans is difficult, since they’re super competitive.
Businesses with solid financial profiles can easily secure these loans. However, SBA supports small businesses and doesn’t have a requirement of a definite credit score, but solid financials and a credit score of 640+ can get you quick approvals on SBA loans.
- 640 – 700 Credit Score for Bank Term Loans
Bank term loans also carry the desirable terms just like SBA loans. Borrowers with a credit score of below 700 and 640+ can secure larger loan amounts with longer repayment periods and lower interest rates. While lending money to small businesses, traditional banks play blind bargain by accepting loan applications, since they need to ensure they’ll be repaid.
So, if your time in business is longer, generating high annual revenues, steady profitability with excellent credit score, you’ll be considered reliable and will be accepted for approval.
- 600+ Credit Score for Equipment Financing
If your business needs to make big purchases like equipment, machinery, automobiles, applying for equipment financing is the most suitable option. Equipment financing is a collateralized funding, where lenders can seize and sell your equipment in case you default on the loan.
If you’re looking for less stringent lending requirements, you can get extended equipment loans since they’re guaranteed collateral for lenders. In order to qualify for equipment financing, you need to have a credit score of at least 600. The loan terms will depend upon the type of equipment you’re financing—its life, the type of industry, and its general use.
- 550+ Credit Score for Short-Term Loans
Short-term loans are great financing options for borrowers in need of quick funding. With short-term loans, you can secure funding up to $250,000, and repayment terms ranging up to 18 months. Another major benefit of short-term loans is that they pose a relatively low risk to the lender as compared to other forms of financing.
In order to secure a short-term loan, you’ll need to have a credit score of 550+. As a rule, the lower your credit score, the higher your interest rates will be on the loan.
- 600+ Credit Score for Invoice Financing
Invoice financing, also known as accounts receivable (AR) financing, is also a type of collateralized financing where you get advances against your business’s outstanding invoices. In this financing option, your customers are the risk factor for the lender, because it’s your customer’s invoices that the lender is collateralizing.
In invoice financing underwriting process, the lender focus more on your business’s invoices rather than your credit score. Some invoice financing lenders count on other factors apart from credit score while making decisions. Remember, if you opt for invoice financing, you’ll not be able to secure as much capital as you would with another type of loan. In order to secure invoice financing, you need to have a credit score of 600+.
Financing Options to Strengthen Your Credit Score
If you have a poor credit score, don’t worry, you’re not alone. Many small businesses are struggling with bad credit score. There are a handful of ways to improve your credit score. For starters, pay your outstanding bills, and on time, every time moving forward.
If you’re unable to qualify for a loan you want, you still have many other financing options available. Here are your best three financing options to help build a solid credit history and improve existing credit.
- A Secured Business Credit Card for all Credit Scores
A responsible use of a business credit card is one of the best way to build and improve credit scores. If your credit is terrible and you’re unable to qualify for a credit card, apply for a secured credit card. A cash security deposit backs such credit cards, which serves as collateral and your credit limit.
Because of this cash deposit, the issuer is willing to offer secured credit cards to borrowers even with poor credit scores. There are also some secured credit cards that actually don’t have any minimum credit score requirements. However, some credit cards require a credit score of 550.
- 0% Intro APR Business Credit Card for 620+ Credit Scores
If your credit score is good but not excellent, and unable to secure the desired loan, consider applying for a 0% intro APR business credit card. With a 0% intro APR business credit card, you can rollover your credit card payments after sign-up, until the end of your introductory period (9-12 months), with no added interest.
After your introductory period is over, a variable APR sets in at a Prime market rate based on borrowers creditworthiness. This rate vary from the market rate, so go over the issuer’s terms and conditions thoroughly for the latest APR information before you make a decision.
In order to secure a 0% intro APR credit card, you need to have a minimum credit score in the 600s. If you sensibly use the card during your introductory period—full and timely payment of bills every month and spend within your credit limit, it can helps build and improve credit scores.
- Revolving Line of Credit for 550+ Credit Scores
A revolving business line of credit is the best-suited financing option for businesses in need of regular capital. With a business line of credit, you can draw the needed fund for any purpose you need. The best thing is, you’ll only pay interest on the amount you use and as long as you pay in full and on time, you can use your credit line as often as you need.
Borrowers with fair credit scores are eligible for business lines of credit. The loan amount and interest rates will depend upon the borrower’s financial profile. A solid financial profile will secure higher credit lines with lower interest rates and vice versa.
A business line of credit is most suitable for startups with limited financial histories. Also, this funding option can help those businesses to build their credit—since it’s revolving, you’ll have several opportunities to confirm that you’re a reliable borrower.
The Bottom Line
Credit score is the chief factor for lenders while evaluating business loan applications. Lenders use this to measure your financial responsibility. However, it’s just one crucial part of your business’s holistic financial profile, and there are different minimum credit score requirement for loan qualification. Look for the financing options based on your financial needs to build or rebuild your credit profile, in order to position your small business for the best loan options available.