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When it comes time to qualify for a business loan, your credit score is one of the top factors that lenders consider. We answer several frequently asked questions (FAQ) about your credit score for a business loan below.
What is Considered a Good Credit Score?
A good personal score to get a business loan is 720 and above. A good business credit score is 80 or above.
Keep in mind the various business credit bureaus may have different scoring systems. Every lender chooses its own standards. So there may be variations in scoring levels. However, the 2020 Small Business Credit Survey (p. 12) by the U.S. Federal Reserve Banks lays out the general rule for the small business lending industry:
- Low credit risk: 80–100 business credit score or 720+ personal credit score.
- Medium credit risk: 50–79 business credit score or a 620–719 personal credit score.
- High credit risk: 1–49 business credit score or less than 620 personal credit score.
Borrowers who are low credit risks get the most choices of loan products and the best terms. Borrowers who are high risk have few choices and will pay the most. Getting even a small loan for business could be tough for high risk borrowers.
Here’s a word from Credit Suite about the credit score you need for a business loan. You can check out after reading:
Is There a Minimum Credit Score for a Business Loan?
Technically, there is no minimum credit score for a small business loan. Every lender has its own requirements.
That said, there are some general rules of thumb in the industry. In practice, a personal score of 620 is widely recognized as the minimum. More than likely you will need a score of 720 or above for good business loan terms.
Can I Get a Business Loan with a 600 Credit Score?
Business owners often want to know: can I get a business loan with a 600 credit score? Or with some other number such as a 500 credit score?
The answer is, it’s going to be hard to get a business loan with a score of 600 or less.
What can you do? If your need for money isn’t urgent, try to improve your credit score enough to get out of the high risk category. That’s the best long-term option. If you need money right away, look into one of the “no credit check required” loans below. Also, see: Small Business Loans with Bad Credit.
Credit Risk Levels Based on Scores
The table below provides a clear categorization of credit risk levels, differentiating between business and personal credit scores. Lenders often use these ranges to assess the creditworthiness of potential borrowers and determine the risk associated with offering a loan. By understanding where you fall on this spectrum, you can better anticipate potential lending outcomes and terms.
| Credit Risk Level | Business Credit Score Range | Personal Credit Score Range |
|---|---|---|
| Low | 80-100 | 720+ |
| Medium | 50-79 | 620-719 |
| High | 1-49 | Less than 620 |
Business or Personal Score – Which Matters Most?
To get a loan for a business, most lenders will look at both your personal and business credit scores. But a good personal credit score is key.
Remember, a personal credit score and a business credit score are completely different things. They use different scoring systems. Even the credit bureaus are different. Some, like Experian, report both types of scores. Dun & Bradstreet is strictly business credit reports. A FICO score is a personal score.
Depending on the type of funding you apply for, most lenders will want to check both scores upon your loan application.
Now, you might wonder why the lender has to check personal credit scores for a business loan.
It’s due to the fact that “owners’ personal finances remain deeply intertwined with the finances of their businesses,” according to the 2020 Small Business Credit Survey. Professor Scott Shane adds that personal credit affects a business loan because so many small businesses are sole proprietors. Therefore, he says, “the business debts are not legally distinct from those of the owner.” He also notes that nationwide, more than half (56%) of small business loans will require the owner to give a personal guarantee, for much the same reason.
Bottom line: most business lenders will want to look at both your personal credit report and business credit report. But personal credit scores remain key.
What Happens if My Credit Score is Low?
If your credit score is low, your small business loan application could be denied altogether. But loan denial is just one of the adverse consequences — there are others.
According to a study by Fundera, the benefits of good business credit can be measured in dollars and cents. Bad credit often results in the following:
- Smaller loan amounts. A good credit score can mean getting approval for up to 20 times more loan money than if you had a bad score!
- Higher interest rates and fees.
- Shorter repayment term, in turn requiring higher payments and squeezing cash flow. Per Fundera’s information, business owners with good credit got an average of about 16 years to repay their loans. People with poor credit got just 8 months.
To compare how interest rates and other terms make a difference, run scenarios on the business loan calculator.
Do I Need a Business Credit Score at All?
A business credit score is not necessary in all cases to get a small business loan.
Small business lenders are pragmatic. A business bank may recognize that a startup with very few years in business won’t have an established business credit history. Sole proprietors may lack an established business credit history because of operating the business mostly in the owner’s name. In those cases, lenders will rely heavily on the owner’s personal score.
However, having a business credit history/score increases your options.
Do Lenders Count Credit Scores of Part Owners?
When it comes to business loans, lenders aren’t only concerned with the business’s creditworthiness but also the financial stability and responsibility of its significant stakeholders. Here’s how the credit scores of part owners play a role in loan decisions:
- 20% Equity Rule:
- Origin: This practice of considering the credit scores of part owners started with the Small Business Administration’s requirements for SBA loans.
- Current Scenario: The 20% equity rule, which means taking into account the credit scores of individuals owning at least 20% of the company, has now been integrated into conventional underwriting standards.
- Who Is Affected?:
- Business Partners: In a partnership setting, partners with a significant stake (i.e., at least 20%) will have their credit score considered.
- Corporations and LLCs: Any individual holding at least 20% equity in a corporation or an LLC falls under this scrutiny.
- Potential Challenges:
- Multiple Low Scores: If a business has more than one part owner and multiple stakeholders have low personal credit scores, the combined impact can significantly decrease the likelihood of loan approval.
- Loan Terms: Even if the loan is approved, unfavorable credit scores can influence loan terms, possibly resulting in higher interest rates or more stringent requirements.
- Strategic Considerations:
- Equity Distribution: Businesses planning to apply for loans might consider the distribution of equity among stakeholders. If a potential stakeholder with a low credit score holds just under 20% equity, it could strategically benefit the company during the loan application process.
- Personal Credit Management: Part owners, especially those nearing or above the 20% equity threshold, should proactively manage and improve their personal credit scores to benefit the business’s borrowing potential.
In essence, lenders adopt a holistic approach when underwriting business loans, considering the business’s financial health and that of its major stakeholders. Part owners should be aware of the weight their personal credit scores carry, particularly if they have a significant stake in the company.
Can I Get A Business Loan Without a Credit Check?
Yes, it is possible to get a business loan without a credit check. However, you will be limited to a few financing options, such as invoice financing, factoring, cash advances, and certain microloans. Crowdfunding and private loans from friends and family are also possibilities.
Make sure to understand the pros and cons of no-credit-check options:
- Positive — Some financing types such as cash advances can be super fast. You get money within hours or a day or two.
- Negative — No-credit-check loans can be expensive with high fees. Interest rates and APR (annual percentage rate) are higher than traditional loans. For cash advances, you lose control. Example: payments may be automatically deducted from your bank account at inopportune times, triggering financial consequences like bounced checks.
What are Examples of Loans Requiring No Credit Check?
One example of a no-credit-check loan is PayPal Working Capital. Small businesses that use a PayPal business account to process at least $15,000 in annual payments can apply for working capital loans. Right on its website PayPal states:
No credit check. Your loan is based on your PayPal sales, so no credit check is required, and it doesn’t affect your credit score.
Square Capital is another popular example that does not require a credit check. Square Capital is open to businesses using the Square payment processing device. The way it works is that Square knows your history of payments received, and can estimate how much you will receive in the future. Your loan amount is based on your volume. Repayment will be automatically deducted from future sales, according to the Square website.
A third example of a no-credit-check option is Stripe Capital, for businesses using the Stripe online payments system.
There are many others. Check for online lenders that provide cash advances without a credit check.
Should I Use Personal Credit for Business Purposes?
No, not long term. Instead of business loans, some small business owners turn to consumer credit, such as home equity loans and personal credit cards. Getting consumer credit is often easier if your business lacks an established credit history. However, relying solely on personal credit sources is not a good long term strategy. Here’s why.
When you rely solely on personal credit cards or consumer loans in business situations, you may find yourself maxed out at the worst possible time. That’s because your business and your family have to share a single credit limit. Let’s review an example of how this limits you.
- Suppose you have a personal credit card and a home equity line with a combined credit limit of $50,000. You decide to use all of that available credit to fund business expansion. The problem is, you’ve left nothing for personal purposes. Consequently, if your truck breaks down, you have no credit available for emergency repair bills. Your credit limit is fully tied up in the business.
- But let’s suppose you also obtain a business loan of $60,000. That would give you a higher total credit limit overall. You would have a total of $110,000 ($50,000 personal + $60,000 business).
Do you see how having more total credit available would allow you to expand your business — without limiting funds you might need for family expenses? That’s why your long term plan should be to build business credit.
Will a Lender Ignore Poor Credit if I Offer Personal Collateral?
No. Some small business owners incorrectly assume their credit scores will not matter if they offer up personal collateral such as a motorcycle or RV. It’s important to remember that a traditional lender does not want property. The lender is in the loan business. The lender wants you to repay the money.
Back in my days in banking, we considered it a final last resort to repossess assets. That’s because there are many expenses involved in repossessing vehicles or levying against other assets like equipment. Then, the lender still has to turn around and find a buyer for the assets. All the while, the collateral is depreciating in value. Months or years later the lender may recover just pennies on the dollar from liquidating collateral — and still be left with an unpaid deficiency.
That’s why most lenders check with the credit bureaus. They want to ensure borrowers have a good record of paying their debts. But don’t be confused. Yes, a lender may likely require a personal guarantee and business collateral such as a UCC filing on accounts receivables as repayment leverage. But the lender gets to this point only after first conducting a credit check.
Now, what if you own personal assets but have poor credit? You could:
- Sell the items. Put an ad on Craigslist, in local classifieds or in specialty classifieds such as ATVTrader.com.
- Pawn the items at a local pawn shop. No credit check is required.
- Check finance companies for loans. Warning: finance companies charge high fees and offer short-term loans in amounts under $20,000. There are some decent finance companies but also bad ones. The Federal Trade Commission strongly advises against predatory financing like car title loans.
As you can see from these FAQs, your credit history — personal and business — makes a significant difference. Whether for an SBA loan, equipment financing or other business loans, credit scores matter.
Image: Depositphotos.com
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