Business loans are an ideal funding source if you’re seeking ways to grow your company without depleting cash reserves. But you can expect a bit more scrutiny from the lender than you’d get if applying for a personal loan.
In most instances, you’ll have to meet stringent requirements to get approved. Your creditworthiness also plays an important role, and a subpar credit score means you’ll likely have to jump through a few hoops to secure a small business loan. And in some cases, you may need to search for alternatives altogether.
Why Does Credit Score Matter for Business Loans?
Your credit score provides a snapshot of how you’ve managed debt obligations in the past. It also predicts the likelihood of default on a new credit account.
Traditional lenders offering small business loans tend to steer clear of credit-challenged borrowers since there’s a high chance they’ll fall behind on the loan payments. Online lenders often have more lenient credit score guidelines. But if you are approved for a business loan, expect higher borrowing costs in exchange for the risk you pose to the lender.
What is Considered a Good Business Credit Score?
Most lenders use the FICO-scoring model to determine if you’re a good credit risk. Your FICO is made up of five components:
- Payment history: 35 percent of your FICO Score
- Amounts owed: 30 percent of your FICO Score
- Length of credit history: 15 percent of your FICO Score
- Credit mix: 10 percent of your FICO Score
- New credit: 10 percent of your FICO Score
Here’s how FICO Scores, which range from score ranges from 300 to 850, are categorized:
- 300 to 579: Poor FICO Score
- 580 to 669: Fair FICO Score
- 670 to 739: Good FICO Score
- 740 to 799: Very Good FICO Score
- 800 to 850: Exceptional FICO Score
As evidenced by the ratings above, a higher credit score is more favorable in the eyes of lenders. Your personal credit score also plays a major role in the interest rate you receive, and you’re more likely to qualify for the most competitive loan terms the lender offers with a stellar credit rating.
Credit Score Requirements for Most Common Business Loans
The minimum credit score you’ll need to secure funding varies by the lender and the type of business loan you’re seeking. It’s equally important to understand that you’ll also have to meet other eligibility criteria to apply for funding, which will be discussed in more detail shortly.
Here are some general credit scoring guidelines to keep in mind:
Traditional Bank Loans
Most traditional banks prefer borrowers with good credit scores, typically in the low- to mid-700s. However, if your credit score isn’t quite there yet, but your credit history is stellar, and your score is in the high- 600s, you may also be eligible for a business loan.
SBA Loans
The SBA doesn’t mandate that borrowers have a certain credit score to be approved for funding. However, a score of 680 or higher positions you to access these government-backed funding opportunities.
Business Term Loans
A credit score of 680 is generally high enough to qualify for a business-term loan. But, again, you may not qualify for the most competitive loan terms, especially if you’re using an online lender. Traditional lenders often want to see scores in the 700s to consider you for funding. So it’s worth improving your score or seeking other funding alternatives if you’re unable to qualify for a loan with attractive terms.
Working Capital Loans
The credit eligibility guidelines for working capital loans are comparable to what you’ll find for business term loans. Credit scores in the high 600s or low 700s are sufficient, and you could have better luck with an online lender if your score is in the low 600s.
Equipment Financing
Ideally, you want to have a personal credit score of at least 640 to qualify for equipment financing. A lower credit rating may be considered, though, since these loans are secured by the equipment you purchase and aren’t as risky for lenders.
Business Line of Credit
The minimum credit score for a business line of credit also depends on the type of lender you choose. An online lender could approve you with a credit score of just 550. However, this figure increases to 680 or higher with a traditional lender.
Merchant Cash Advance
These loan products cater to small business owners with lower credit scores who’ve exhausted all other funding options. The minimum credit score requirement is generally around 550, although some financing companies will approve you with a score of just 500. However, be mindful that the ease of access comes at a cost, as you can expect to pay exorbitant interest rates. You should also know that some lenders will approve you for a merchant cash advance without checking your credit score.
What Other Requirements Do Lenders Look For?
Beyond credit scores, most lenders consider your industry, time in business, annual revenues and the overall financial health of your company. Ideally, you should operate in an industry that’s stable and projected to expand over time.
It’s equally important to lenders that you’ve been in business for a set period of time to prove you have industry expertise and the experience needed to keep operations running smoothly. The standard requirement is two years, but some online lenders will approve you for a loan with just six months in business. There are also instances where small business owners who are just starting out can access funding if they have good or excellent credit.
You’ll also need to meet the lender’s minimum annual revenue requirements and provide financial statements. This figure and the income projections should demonstrate that you’re able to make timely payments over the loan term.
