Credit scores are extremely important when financial institutions decide whether to provide a borrower who wishes to start a small business with a loan. Your credit score is a reflection of your ability to handle your money, and a low score gives the impression that you don’t have the skills needed to properly manage your finances. By understanding how your credit score and other factors will be evaluated when applying for a small business loan through the U.S. Small Business Administration (SBA), you will be better prepared to complete the application process.
Your business credit score is important in determining whether or not you will receive financing for a small business loan. When determining your credit score for an SBA loan, the following information regarding your business will be collected:
• Information about credit obligations from your lenders and suppliers
• Legal filings from your county, state, and local courts
• Background information about your company from independent sources, which can include public records, collections agencies, credit card companies, and state filing offices
• Collection information
• Actual experiences of trade payments that have been submitted by payees
It is important to view your credit report to determine your business credit score. A variety of circumstances can result in a low business credit score, and these situations can jeopardize your chance of receiving a small business loan.
• Years in the business or size of the business
• Current judgments, liens, bankruptcies, or collections
• A trend of slower obligation payments
• Increased business credit applications or inquiries
A personal credit score will work for a business loan in the same way that it is taken into account for other loans. Factors that are considered when determining your personal credit score include the following:
• Payment history
• Amount of debt
• Length of credit history
• New credit or amount of available credit
Typically lenders at larger banks will not finance a loan with a credit score of less than 640. A personal credit score of 700 or greater will provide you with a better chance of getting approved, and you are more likely to acquire a reasonable interest rate with a credit score in this range.
The SBA has not published definitive thresholds for credit scores in their SBA loan requirements. However, experience has shown that a personal credit score of over 650 will usually be approved by the SBA. A personal credit score sitting from 600-650 will usually require a meeting to discuss issues, while scores less than 600 usually result in a denied request. Typically these requests will be denied due to the inability for the SBA to reasonably anticipate the ability of a borrower to adhere to the loan’s terms and conditions.
Tips and Considerations
In order to qualify for a small business loan based upon your personal credit, you will typically need to have a strong credit history. In many cases, lenders suggest that businesses first build a business credit history before they apply for a loan, and this can be done by buying supplies from certain vendors who report to the credit reporting agencies. This can help you to build your business credit score even before you set up operations. In the event that you have a poor credit score and are having difficulty with finding a funding source, consider checking with a local or community bank instead of a nationwide lender. A local bank is more likely to forgive a low personal credit score in the event that your business credit score is acceptable. Some lenders also exist that will specifically lend to individuals with poor credit, but you can expect an extremely high interest rate that will only come down once your business begins to make money with these loans.
A good credit score can play a pivotal role in whether or not borrowers are able to secure a small business loan. Both business and personal credit scores are taken into account, and by better understanding how this process works, you can attempt to raise your score to secure an SBA loan for your small business.