Business Banking

What credit score do I need for a business loan?

The credit score you'll need for a business loan varies based on which lender you're borrowing from and the type of loan you choose. Here's what to expect before applying for business loans.

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Although credit score requirements for business loans vary from lender to lender, you’ll generally need a FICO score of between 540 and 560 to qualify for short-term loans. Bank term loans and SBA loans require even higher scores– typically over 650.

So, what loan options do you have if you’re a business owner with bad credit? You can turn to online lenders and neo banks that offer alternative financing. Most of them have short-term business loans that you can qualify for with a personal credit score that dips in the 500s and even 400s. However, they are likely to ask for a big collateral and slap a high interest rate on the loan.

This goes to show that your personal credit score matters when you’re shopping for business loans. It can make the difference between accessing affordable loans and overstretching your cash flow with costly credit facilities. In fact, poor personal credit can prevent your business from accessing loans altogether.

FICO score range

Most people and lenders often refer to FICO when they talk about personal credit scores. FICO is short for the Fair Isaac Corporation, which is the very first company to create a credit risk model with scores.

FICO personal credit scores range from 300 to 850, with 300 indicating poor credit and 850 showing exceptional credit. Lenders use this score to assess the amount of risk that prospective borrowers pose.

The score helps lenders to quickly evaluate consumers’ creditworthiness without having to analyze their entire credit histories. Below are the 5 levels of credit scores and what they mean. 


Learn more about FICO scores here.

Why do lenders look for a good credit score?

Lenders run credit checks to assess the kind of borrower you are. Your credit score gives them an idea of how you have historically managed personal credit. If you have a good credit score, it means that you are a diligent borrower, which makes you less of a risk.

On the other hand, if your credit score is on the lower side, it means that you might lack the ability to make payments for your small business loan. This makes you a high-risk borrower.

In short, lenders look for a good personal credit score because it indicates that you properly manage debts and financial obligations. You’re reliable and can be trusted to handle debts without defaulting or even missing monthly payments.

The lender is less likely to lose any money in taking you up as a debtor, and for that reason, they’re often more than happy to give you favorable terms to accompany the loan debt. That includes low interest rates and affordable fees. Your personal credit score carries even more weight if your business credit history is short.

Want to build your business credit? Here’s a step-by-step guide on how to do it.

That said, your personal credit score is not the only thing that a lender will look at when reviewing your business loan application. They’ll also check your revenue, cash flow, years in business, debt-to-income ratio and so on. You can refer to the later sections of this article for further requirements for a small business loan.

Credit score needed by various financial institutions

The minimum credit score for a business loan largely depends on the lender. While there are general guidelines that can help you know if you qualify for a particular credit facility, oftentimes a lender will set their minimum credit requirement. Here’s what you can generally expect from various financial institutions as far as required credit scores for small business loans:

Banks and credit unions

Commercial banks, community banks, and credit unions typically have the highest credit score requirements. While some will consider scores of 650, most prefer FICO scores of 680 and above. The upside is that you’re likely to get lower interest rates from banks and credit unions compared to other financial institutions.

SBA lenders

SBA loans are generated by private lenders (banks and credit unions) and guaranteed by the Small Business Administration (SBA). This guarantee incentivizes lenders to slightly lower the credit score needed for business loans. You can qualify for an SBA loan with a score of 620. The downside is that SBA loans are extremely hard to get.

Neo banks and online lenders

Neo banks and online lenders have the most relaxed credit score requirements. Most of them don’t even do personal or business credit checks, making them ideal for small business owners with poor credit histories. If your score is in the 500s or 400s, consider applying for a loan from an online lender or neo bank.

Credit score needed by business loan

As already mentioned, every financial institution will set their own minimum credit score for business loans. Further, they may set a minimum credit score for small business loans based on the type of loan. Here’s what you can generally expect as personal credit score requirements for small business loans:

Traditional bank loans

Preferred credit score: 700+

Bank term loans are the most demanding when it comes to the minimum required credit score. Traditional banks – the brick-and-mortar type – prefer borrowers with a personal credit score of at least 700. However, you may still qualify with a score of 620 and above.

The reason why banks prefer diligent borrowers is because they offer favorable terms, including longer repayment periods, lower interest rates and affordable loan fees. This puts bank term loans up there with the most affordable sources of small business finance.

Click here for a comprehensive list of sources of small business financing.

However, in addition to setting a high credit score requirement, traditional banks also have a lengthy loan application process and generally harder qualification criteria. That’s because they are heavily monitored by state and federal agencies.

SBA loans

Preferred credit score: 620+

While the credit score required for SBA-guaranteed loans varies depending on the type of loan, lenders generally prefer borrowers with at least 620 FICO score. The federal government guarantees SBA loans up to 85%, which encourages lenders to relax their lending terms.

However, SBA loans are highly competitive on account of their low interest rates, which can dip as low as 2.5%. That, coupled with their lengthy repayment periods (up to 10 years) makes SBA loans highly attractive to small business owners. To minimize the competition, lenders often prioritize borrowers' great credit histories.

Equipment financing

Preferred credit score: 600+

Equipment loans are meant for small businesses that need to acquire, upgrade or repair their machinery, equipment and tools. For these types of loans, lenders typically consider credit scores as low as 600. That’s because equipment loans are self-secured, which means that the equipment you purchase acts as collateral for the loan.

Should you fail to repay the loan, the lender can seize the equipment. This nature of equipment financing makes it less risky compared to other options like term loans. Thus, you can score equipment financing even with a fairly low personal credit of 600.

Business lines of credit

Preferred credit score: 550+

A business line of credit is a type of loan where a lender approves your business for a certain amount of money. You then tap into that fund as needed to address business expenses as they arise.

If, for example, you are approved for a line of credit worth $100,000, you can draw from that fund up to that limit. Most lenders won’t restrict you on how to use a business line of credit, which means that you can use it for things like payroll, lease payments, interest payments, purchase of inventory, paying utility bills, and so on. Any amount that you repay goes back into the fund and you can borrow it again. This makes a line of credit a type of revolving fund.

How does a small business line of credit work? Click here for everything you need to know.

Most lenders will require a minimum credit score of 550 before approving your business for a line of credit. Furthermore, your personal credit history will determine the limit set on your line of credit. If you have a good score, you’re more likely to get a high limit on your credit line. You may also get excellent terms like a low interest rate.

Short-term business loans

Preferred credit score: 540+

Oftentimes the lowest credit score needed for a short-term business loan is 540. According to Experian, the national average consumer credit score in the U.S. is 703. That means most small business owners are eligible for short-term loans – at least as far as credit score requirements.

However, the lowered credit requirement exposes lenders to a higher risk, which they often counter with more stringent repayment terms. For example, most short-term loan lenders require that you pay back the entire loan within 12 to 24 months. They may also ask that you make weekly or even daily payments rather than monthly.

So, while you may easily meet the credit score requirements of a short-term loan, it’s not always the best option for a small business, particularly if your cash flow is stretched.

Merchant cash advance (MCA)

Preferred credit score: 500+

A merchant cash advance is one of the best alternative financing options to short-term business loans. Since you can qualify for MCA with a credit score as low as 500, it is an especially viable option if you have poor credit history.

In fact, some lenders don’t do credit checks at all for cash advances. That’s because it’s one of the least risky credit options out there from the perspective of the lender. Just note that in addition to making daily payments, you may need to grant the lender a portion of your future revenue.

Invoice financing

Preferred credit: no credit score requirements

If you’ve had a very unpleasant credit history that locks you out of most small business loans, consider opting into invoice financing. Most lenders who offer invoice financing generally don’t do credit checks at all. That’s because financing is based on your customers’ ability to repay their loans, not yours. As such, it’s your customers’ credit scores that matter the most.

Having said that, some lenders may still run a credit check on you before approving your invoice financing application. So, you may still want to build your personal credit score even if you’re only aiming to use invoice financing.


Can you qualify for a business loan without the required credit score?

You may still qualify for a small business loan even if you don’t meet the minimum credit score requirement. Quite a good number of lenders will consider (and approve) your loan application as long as your business meets other eligibility criteria. These include annual revenue and time in business.

A minimum annual revenue of $120,000 and at least six months in business might compensate for a low credit score. The longer you’ve been in business, the better your chances of getting a loan without the required credit score. The same applies for revenue – the higher it is, the better your chance.

Fintech lenders are especially more likely to approve your loan application even if you don’t meet personal credit score requirements. Most of them focus on your business’s potential and opportunity rather than your credit score. Justifiably so, since many small business owners face credit challenges while growing their companies. Thus, using a credit score to assess an entrepreneur’s potential tends to draw an inaccurate picture. If your company has a strong financial status and shows signs of growth, you can consider approaching fintech lenders.

That said, there’s no guarantee that a fintech lender will approve your loan application if you have a bad personal credit score. Should that option fail, you still have choices in the form of microloan programs, peer-to-peer sites, and grants.

Here’s a list of microloans, peer-to-peer sites, grants, and other funding options for small businesses.

Tips to raise your credit score before applying for a business loan

According to myFICO, your personal credit score is based on five factors:

  • Payment history – contributes 35% of the score
  • Amounts owed – contributes 30%
  • Length of credit history – contributes 15%
  • Credit mix – contributes 10%
  • New credit – contributes 10%

Each factor has a varying degree of importance. Combined, they tell a lender how often you make timely payments for debts, the amount of time you have been using credit accounts, and whether you tend to overspend.

For example, lenders will see you as a high-risk borrower if you frequently open new credit accounts and utilize large percentages of your available credit. They’ll also be reluctant to approve your small business loan if you have many personal loans – including mortgages, car loans, and credit cards.

So, consider paying off some personal loans to boost your credit score and increase your chances of qualifying for a business loan. Below are more tips to raise your credit score before applying for a business loan:

  • Check your credit report. 34% of consumers find at least one mistake in their credit reports, according to Forbes. Such mistakes can negatively misrepresent your credit score. Therefore, before applying for a small business loan, start by pulling your credit report and weed out all the errors.
  • Pay your bills on time. 35% of your credit score is determined by your punctuality in payments. These include debts, rent payments, lease payments, and loans. You’ll want to pay special attention to credit card payments because they are among the financial obligations with the biggest impact on your credit score.
  • Lower your debt to credit ratio. Also known as debt to credit rate or credit utilization rate, the debt to credit ratio refers to the proportion of your available credit that you’re actually using. If, for example, you have $10,000 worth of revolving credit and you use $6,000, then your debt to credit ratio is 60% (calculated as 6,000 / 10,000 x 100%). A high (and rising) debt to credit ratio indicates that you’re slowly sinking in debt. You’ll want to keep it under 30% to boost your personal credit score. If it can dip below 10%, all the better.
  • Request an increase in your credit limit. Credit cards and credit lines constitute your revolving credit. If you get a higher limit on these two, the amount of your available credit will increase. That, in turn, will push your debt to credit ratio downwards. It’s recommended that you don’t open new credit lines in an attempt to increase your available credit. Instead, try to request your current lenders to increase the limit on your current revolving credit accounts. Opening new credit accounts impacts 10% of your credit score, and not always in a positive way.
  • Try using a secured personal credit card. A secured credit card is one that is backed by a cash deposit security. You basically place a refundable deposit when opening the account. The deposit protects the lender against potential risks that you may pose as a borrower. For this reason, secured credit cards are fairly easy to get even if you have a poor credit score. Payments on secured credit cards are included in your credit report, which makes it a great way to boost your score. However, remember that missing payments may hurt your credit score because the lender will still report the missed payments regardless of your deposit.

What other factors do lenders consider for a business loan?

While your personal credit score is an important consideration when you’re applying for a small business loan, it’s not the only factor that lenders consider. Things like assets, time in business and annual revenue also come into play. Here’s a list of other things – besides credit score – that a lender may look at before approving your loan application:

Business credit score

Businesses have credit scores too, and some lenders consider them when evaluating loan applications. In fact, in some cases you may use your business rather than personal credit score to qualify for a credit facility provided you have a good business credit history.

Want to build a business credit score? Here’s a comprehensive guide on how to do it.

Three of the four mainstream business credit bureaus – Experian, Dun & Bradstreet, and Equifax – have a ranking scale that ranges from 0 to 100. The higher the value, the better the credit score of your company.

So, what’s the ideal credit score for a business loan? Most lenders prefer a score of around 80 (76 for Experian’s Intelliscore ranking). If you’re using the FICO SBSS scoring system – which ranges from 0 to 300, then the magic number to aim for is 140.

Business plan

It’s not uncommon for a lender to request to view your business plan. In short, a business plan is a document that outlines your business goals, the methods for achieving those goals, and the time-frame needed to achieve them. It also outlines how you plan to use the financing that you’re applying for to achieve the goals you’ve set.

Lenders use business plans to analyze where your business is coming from and where it’s going. Therefore, you’ll want to make sure that you create a convincing yet realistic business plan before applying for a loan.

Not sure how to make an effective business plan? Here’s a guide for small business owners.

Time in business

The number of months or years that you’ve been in business also play a part in your qualification for business loans. The longer you’ve been in business the more momentum you have, which makes you a less risky borrower. Depending on the type of loan you’re applying for, the minimum time in business may be anywhere between 6 months and 2 years.

Cash flow

Lenders can learn a lot by looking at your cash flow. It doesn’t just show how much money your business makes; it also indicates how well you manage cash and how much of it is left once you’ve paid all business expenses. Such information is very handy when determining things like debt-to-income ratio. For that reason, it’s common for lenders to ask for your cash flow statements going back four months. They may also request that you give cash flow projections to demonstrate how funding will improve your business.

Revenue

Even if you have the credit score for a small business loan, you may still be ineligible if your company doesn’t make enough money to meet monthly (or weekly/daily) payments for the loan. Lenders want to ensure that you’re capable of paying back the loan in full. And that’s where revenue comes in.

Oftentimes they’ll set a minimum revenue requirement for particular types of loans. For example, you may need an annual revenue of $150,000 to qualify for bank term loans and at least $100,000 to be eligible for short-term loans.

Assets

Depending on the type of loan, a lender may ask you to secure the loan with collateral. This is essentially an asset that you pledge to the lender so that if you default the loan, the lender can seize it. To the lender, collateral reduces the risk of losing money.

In addition to business assets, most lenders will also pledge personal assets as collateral for business loans. It may be a home, car, or pretty much any valuable personal possession. This is known as a personal guarantee and it’s mostly needed when your business doesn’t have enough assets to secure a loan.

Collateral requirements vary depending on the loan amount. However, the rule of thumb is a collateral coverage ratio (CCR) of 1.0 or 1.6.

A 1.0 CCR means that the value of collateral is equal to the loan amount. If the CCR is 1.6, it means that you have overcollateralized the loan, which makes it even less risky to the lender.

The bottom line

While there’s no one particular credit score needed for a business loan, most lenders prefer borrowers with diligent credit habits. Thus, you are more likely to qualify for a business loan if you have a high credit score – typically 700 or above.

However, even if your credit score is less than decent, you may still qualify for alternative financing. These options include fintech loans, microloans, peer-to-peer financing and even grants. Furthermore, good financial health in your business may offset a high credit score requirement. Therefore, if your business has a combination of a low debt to credit ratio, high revenue, and sufficient assets, you may still qualify for certain business loans.


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