What Credit History Is Considered for a Small Business Loan?

A small business loan usually involves a lengthy application process. The lender you work with and the kind of loan you want will both have different requirements. To be eligible for a business loan, you must typically have a minimum credit score. 

Credit scores allow lenders to assess the risk involved with lending money to a person as well as the credit history of the borrower. Lower credit scores could make it harder for business owners to get the loans they want. 

In light of this, let’s take a look at the various credit scores needed for small business loans.

How to Get a Business Credit Score

Many business owners are unaware that their firm can have a separate credit score from their personal one. To get a business credit score, the company must be recognized as distinct from you. The simplest way to do so is to get an Employer Identification Number (EIN) from the IRS. Business credit scoring agents will track your company’s credit history once you’ve been assigned a number.

Why Credit History is Important to Apply for Small Business Loans

Having all of this data in mind, you may be asking why, in the first place, your credit score is so crucial when asking for business loans. Throughout the small business debt insurance process, lenders assess the lender’s risk. It includes the chance that the client will not repay their loans. Many aspects, such as a firm’s inexpertise or low income, might imply potential risk. So, how does your credit rating factor in?

Your credit score is a history of your economic activity. So, if you’ve been unable to settle your loans on time in the past, it’s a safe bet that you won’t be able to return your firm bills and loans on time. In contrast, if your personal fiscal history is mostly flawless, there’s a strong chance you’ll also keep track of your firm’s finances. Of course, you may have a business credit score as well. Personal credit scores are often more vital to lenders. Also, high personal and business credit ratings can help you qualify for a low interest rate.

How Does Your Personal Credit History Affect Your Eligibility for a Small Business Loan?

Most small businesses will lack a separate, credible, and well-established business credit score. At that moment, lenders will use your personal credit history as a proxy for your firm. A higher personal credit score will increase your chances of being approved for a loan. It also affects your loan term, EMIs, and the interest rate charged.

Your personal credit score is also crucial for secured and unsecured loans. You may be able to apply with a lesser credit score if you provide a personal guarantee as collateral. You can get a loan without collateral as well. However, it will cost you more in terms of interest. So, you will need a high personal score to secure the desired loan.

Minimum Credit Scores for Small Business Loans

Here’s how your credit score affects your chances of getting a small business loan. Remember that this is only one of many factors considered by lenders during the approval process.

A credit score of 550 or lower 

When the owners of a small business have credit scores in this range, most lenders will deny offering them loans. In some of these cases, you have to be eligible for a loan from a specialized lender. But the interest rates will most likely be very high. You may also be able to obtain merchant cash advances or invoice financing. But, do your research and proceed with caution as always.

A credit score between 550 and 600 

Your small business loan might not be approved by most banks at this point. The interest rates will still be high even if they do or if you have access to alternative lenders.

A credit score between 640 and 700 

This is still too low to meet the criteria for most banks’ loans. There are a lot of lenders available to you who might offer you a loan. But the interest rates will still be higher than they would be for traditional loans.

A credit score between 700 and 750 

Here is where you can simply apply for traditional bank loans and SBA loans. Most financing options are still available. But, you will usually need considerable documents and proof of your company’s ability to pay. Also, you might still find yourself on the high side of interest rates.

A credit score of 750 or higher 

With low-interest rates and useful repayment terms, you’re in the best possible position. With this high credit score, you will be able to obtain affordable financing.

Minimum Credit Scores Needed by Various Lenders

The minimum credit scores needed by distinct groups of business lenders are listed below as a quick reference: 

• A traditional bank needs a personal credit score of 680 or higher to grant a loan to your small business.  
• To qualify for a loan from the Small Business Administration, you must have a personal credit score of 680 or higher.  
• A personal credit score of 630 or higher is needed for many loans to buy vehicles, equipment, and other assets for businesses. 
• For short-term loans from highly specialized alternative lenders, you need a personal credit score of at least 600.  
• You must look for very specialized lenders if your credit score is below 600. The interest rates will be high. But, you may still be able to access merchant cash advances or invoices at this level.  

Conclusion

Don’t be afraid if you don’t have a business credit score. The vast bulk of small business loan requests will favor your personal credit score over your firm’s credit score. If you’re asking for an SBA loan or a bank term loan, you’ll simply need to produce a firm credit score. Visit Piramal Finance for more blogs on business loans and to take a look at their products and services.