It’s no secret that it’s tough for Main Street business owners to get the financing they need to grow and operate profitable businesses. Most lenders (even non-traditional lenders) look at some of the same business loan requirements—they might just weigh their importance differently.
Before you go into the bank, you’ll want to know where you stand with these four very important metrics:
- Your credit score—both your personal and business score (yes, there is more than one)
- Years in business—most banks want to see four or five
- Your annual revenues—more is better than less
- Your collateral—there are different types of collateral, depending upon the type of loan you’re looking for
Credit score is number one for a myriad of reasons. It’s the most important metric and is the cause of most rejections. Although there is hope for business owners with less-than-stellar credit, those options come with a cost. What’s more, on Main Street, most bankers are just as interested in your personal credit rating as in your business rating—sometimes even more.
Minimum credit score by loan type.
Here are the minimum personal credit score requirements for each type of business financing to get an idea of the options available to you.
| Type | Credit score requirement* |
| SBA loan | Minimums start at 650 |
| Term loan | Minimums start at 600 |
| Line of credit | Minimums start at 600 |
| Invoice factoring | Typically have no credit score requirement |
| Equipment financing | Minimums start at 520 |
| Business cash advance (Merchant cash advance) |
Minimums start at 500 |
| Commercial real estate | Minimums start at 650 |
Why credit score matters.
Credit scores play an influential role when it comes to securing a business loan. This three-digit number is a quantifiable measure of your fiscal responsibility and reliability, providing lenders with a quick, objective assessment of your credit risk.
In essence, a good credit score signals to lenders that you’ve consistently fulfilled your financial obligations to other lenders on time and are likely to repay their loans promptly. Consequently, businesses with higher credit scores are often offered more favorable loan terms, including lower interest rates and longer repayment periods.
Conversely, a bad credit score could denote a higher risk proposition for the lender, potentially leading to a rejected application or a higher interest rate and stringent loan conditions.
Personal credit score.
One of the most commonly used personal credit scores is the FICO Score, developed by the Fair Isaac Corporation. The FICO Score is calculated based on five main components, each weighted differently:
- Payment history (35%) – This represents whether you’ve paid past credit accounts on time.
- Amounts owed (30%) – This includes the total amount of credit and loans you’re utilizing compared to your total credit limit, also known as your credit utilization ratio.
- Length of credit history (15%) – This considers the age of your oldest credit account, the age of your newest credit account, and an average of all your accounts.
- New credit (10%) – This comprises the number of new accounts you’ve opened or applied for recently, including credit inquiries.
- Credit mix (10%) – This takes into account the diversity of your credit portfolio, including credit cards, retail accounts, installment loans, mortgage loans, and others.
FICO credit scores range from 300 to 850. Here’s a general classification of FICO scores:
Bad credit: 300-579
Within a credit score of 300-579, you’ll struggle to qualify for business financing. Once your score gets above 500, you may qualify for a cash advance, equipment financing, or invoice factoring depending on the lender and whether you meet other requirements.
Fair credit: 580-669
With a fair credit score of 580-669, you’ll meet most minimum credit score requirements for a cash advance, invoice factoring, or equipment financing. If your score is 600 or above, you’re more likely to qualify for a line of credit or term loan.
Good credit: 670-739
Within this credit range, you’ll likely meet all lender’s minimum credit requirements for term, SBA, commercial real estate, and bank loans.
Very good credit: 740-799
Exceptional credit: 800-850
Business credit score.
A business credit score, much like a personal credit score, is a numerical representation of a business’ creditworthiness. It provides a quick, objective snapshot of the financial health of a business and its ability to repay debts on time. The score is generated by credit bureaus such as Dun & Bradstreet, Equifax, and Experian, and ranges typically from 0 to 100.
The calculation of a business credit score considers several factors, including:
- Payment history – As with personal credit, timely repayment of debts is crucial. Regular, on-time payments to creditors enhance your business credit score.
- Credit utilization ratio – This measures how much of your available credit your business is currently using. A lower ratio (meaning you’re using less of your available credit) can positively impact your score.
- Length of credit history – Longer credit histories can benefit your business credit score, as they provide more data about your business’ long-term financial behavior.
- Public records – Bankruptcies, liens, and judgments can negatively affect your business credit score.
- Company size and industry risk – Larger companies and those in industries considered less risky may have higher credit scores.
Lenders will typically review both your personal credit score and business credit score when qualifying you for a business loan.
How to increase your credit score.
If your credit score isn’t where you’d like it to be, there are several steps you can take to boost your score.
Monitor your credit reports.
Equifax, Experian, and TransUnion are where you’ll want to go to see your current credit reports. Make sure the information is correct and that your credit report reflects reality. Make sure that the report is accurate and that accounts that aren’t yours aren’t reported. Bankruptcies that are over 10 years old or the associated accounts shouldn’t be reflected on the report. Other negative information older than seven years should also not be included in the report.
Get a major credit card.
Getting a credit card and using it wisely is one way to boost your credit. Be sure to make your payments on time.
Arrange automatic payments on every card or loan.
It’s easy to forget to make a payment when it’s due or let travel or a busy schedule distract you. However, credit scores are very sensitive to whether or not you make payments on time, so do all you can to keep your payments regular and on time.
Don’t let disputes go to collections.
If you have a dispute with a vendor and you allow it to escalate to collections, it doesn’t look good on your report. Rather than taking this path, it’s better to pay under protest and go to small claims court. Don’t get sued, though, as lawsuits and judgments are also major dings to your credit.
Consolidate your debt if you can’t pay it off quickly.
The scoring criteria treat installment loan balances kinder than the same balances on a credit card. But be wise with your credit card balances and avoid running them up.
Take debt off your credit report entirely.
This is a tough one, but family, friends, or dipping into your retirement plan is sometimes a good way to get credit off your report entirely. Be careful about dipping into your 401k. If you borrow from a 401k and repay it there are no tax consequences, but if you withdraw money, there will be tax consequences.
Don’t close accounts or let them be closed.
It might not help your scores and could hurt them. If you’ve got a card you haven’t used for a while, take it out to dinner or buy a tank of gas, just make sure they’re included with your other automatic payments.
Don’t apply for credit you don’t need.
At about five points an application, if you have sketchy credit, it can add up.
Depending on how bad your score looks today, you might need to invest some time—but there is hope. Just remember, your credit score is the first thing any lender will look at before they offer you a small business loan.
Ready to compare business loan options? Apply for a small business loan.
Quickly compare loan offers from multiple lenders.
Applying is free and won’t impact your credit.
*The information contained in this page is Lendio’s opinion based on Lendio’s research, methodology, evaluation, and other factors. The information provided is accurate at the time of the initial publishing of the page (Feb 5, 2024). While Lendio strives to maintain this information to ensure that it is up to date, this information may be different than what you see in other contexts, including when visiting the financial information, a different service provider, or a specific product’s site. All information provided in this page is presented to you without warranty. When evaluating offers, please review the financial institution’s terms and conditions, relevant policies, contractual agreements and other applicable information. Please note that the ranges provided here are not pre-qualified offers and may be greater or less than the ranges provided based on information contained in your business financing application. Lendio may receive compensation from the financial institutions evaluated on this page in the event that you receive business financing through that financial institution.
Read the full article here
