What Credit Score Do You Need for a Business Loan?
Unlock business loan opportunities by understanding the credit scores lenders require for funding eligibility.
Credit scores are fundamental for securing business loans, helping lenders assess risk and a borrower’s ability to repay. They provide a quick, objective assessment of financial health, influencing eligibility and loan terms. Understanding how different credit scores function and what lenders look for impacts a business owner’s ability to obtain funding. Both personal and business credit histories play a role, their relevance often depending on the business’s age and structure.
Credit’s Role in Business Lending
Credit provides lenders with insights into a borrower’s financial reliability. Lenders rely on credit information to assess timely loan repayment and determine appropriate loan terms, including interest rates and repayment schedules. A strong credit profile indicates lower default risk, making a borrower more attractive and leading to more favorable financing.
Two types of credit are relevant: personal and business. Personal credit serves as an initial assessment, especially for new ventures or small businesses without established corporate credit history. As a business matures, its dedicated business credit profile becomes important, reflecting its independent financial standing. This interplay shapes a lender’s overall perception of risk.
Personal Credit Scores for Business Loans
A personal credit score (FICO Score or VantageScore) is a three-digit number summarizing an individual’s creditworthiness. These scores are relevant for business loans, particularly for startups, sole proprietorships, or businesses without a separate business credit history. Lenders use these scores to evaluate the business owner’s personal financial responsibility, as personal finances are often intertwined with early-stage business operations.
Factors influencing a personal credit score include:
Payment history (35% of a FICO Score) holds the most weight, reflecting consistent on-time payments.
Amounts owed, including credit utilization (percentage of available credit used), make up 30%, with lower utilization being more favorable.
Length of credit history (age of accounts) contributes 15%.
New credit inquiries and credit mix each account for 10%.
Business Credit Scores
A business credit score assesses a company’s financial health and ability to meet obligations. Unlike personal scores, these evaluate the business entity directly and are used as a business matures. Major models include Dun & Bradstreet PAYDEX, Experian Intelliscore Plus, and Equifax Business Credit Scores.
These scores differ from personal scores by focusing on business-specific financial behavior. Factors influencing a business credit score include payment history with suppliers and vendors, demonstrating on-time or early payments. Public records, such as bankruptcies, liens, and judgments, also impact the score. Business age, industry classification, and financial statement health are additional elements contributing to creditworthiness.
Lender Credit Score Requirements
Lenders have varying credit score requirements for business loans, depending on the lender and loan product. These requirements serve as general guidelines; individual circumstances can influence a lender’s decision. Understanding these thresholds helps business owners gauge eligibility for different financing options.
Traditional banks require higher personal credit scores, seeking a FICO Score of 680 or above for business loans. For Small Business Administration (SBA) loans, personal credit scores need to be at least in the mid-600s, with some lenders requiring 680 or higher, particularly for SBA 7(a) loans. The FICO Small Business Scoring Service (SBSS) score (0-300) is also used for SBA loans, with a minimum threshold of 155-165 for some programs.
Online lenders exhibit more flexibility, accepting personal FICO scores as low as 500-600. This flexibility is due to their focus on other financial indicators, such as cash flow or business revenue. Alternative lenders, including some online platforms, may offer options for borrowers with lower scores, though these loans might come with higher interest rates. For specific loan products like term loans, a personal credit score of 600-680 might be a minimum, while lines of credit require at least 620. Invoice factoring can be more lenient, approving scores as low as 500, as the underlying collateral is the business’s invoices.
Accessing and Monitoring Credit Scores
Business owners can proactively manage their financial standing by regularly accessing and monitoring personal and business credit scores and reports. For personal credit, federal law provides free annual credit reports. Individuals can visit AnnualCreditReport.com or call 1-877-322-8228 to request a free report from Equifax, Experian, and TransUnion. Reviewing these reports for accuracy and identifying errors is important, as discrepancies can negatively impact creditworthiness.
Business credit reports are obtained directly from major business credit bureaus like Dun & Bradstreet, Experian Business, and Equifax Business. Unlike personal credit reports, these come with a fee. Regularly checking these reports helps business owners understand their credit standing, identify issues, and ensure their business credit profile accurately reflects payment behavior and financial health. This proactive approach helps prepare for future loan applications.