The Role of Personal Credit Scores for Small Business Loans

Personal credit plays a bigger role in obtaining a small business loan than one might think. For most small business loans, the business lender will almost always look at your credit score. Credit scores are an important factor in helping the underwriters determine how trustworthy and financially stable the borrower is. The lender will be more inclined to accept an application and offer good terms to an applicant with good credit. On the other hand, business owners with lower credit scores will likely have a tougher time acquiring more desirable loans. If you have a poor credit score, it would be a good idea to start improving it.

So, we know that credit score is an important deciding factor for underwriters in approving applications, but you might be wondering which credit score is more important. One is not necessarily more important than the other. If your business is newer, then personal credit will matter more to lenders. If your business has a decent history, then they will likely consider your business credit more than your personal credit. That being said, lenders tend to look more closely at your personal credit.

There are several articles we have published about how to obtain a small business loan. This article will cover a variety of things. It will mainly focus on how personal credit affects small business loan approvals, and the best way to manage personal credit to improve the probability of getting approved. It will also discuss how to manage your personal credit to obtain the most optimal small business loan option. This article is a guide to not only obtaining a small business loan but also securing the most advantageous terms for your business.

Every type of loan and every lending institution will require a different minimum credit score when they consider a borrower’s eligibility. It’s worth looking at the minimum credit scores required for each loan type.

Small business loans are not dependent on a 700-credit score or greater as with a consumer loan. A personal credit score is not weighted as much as with consumer loans, and it is not always the initial threshold that needs to be crossed. A small business loan underwriter will focus on the financial strength of the business owner first and foremost. What is the gross annual revenue of the small business? What is the cash flow of the small business? How much business debt does the merchant have on that particular entity? These are all heavily weighted factors. The underwriter will also examine risk factors and mitigators. What is the business credit score? How do the merchant’s payables (current and past due accounts) affect the ability of the business owner to pay back a small business loan, even though the merchant might have a personal 700 credit score? There are other factors, such as industry, comparable debt and time in business.


Things that the small business owner can not control


Industry (Categorized by SIC or NAICS Code)

A merchant can’t suddenly change the industry in which they operate. Some lenders view a specific industry as risky, whereas other lenders will prefer that same industry. Finding a lender that specializes in a specific industry or one with a broad range of programs is the best approach. Doing so will ensure the best chance at obtaining approval, as well as securing the best program and terms for a specific industry.

Time in Business

Lenders care about the age of your business. The longer the time in business, the more favorable that merchant looks from that particular perspective in terms of risk grading. Unfortunately, we can’t speed up time to more quickly put more rings on the metaphorical tree of our business; the need for growth capital can’t always be slowed down to allow the business to season. If your business is relatively new, make sure the professional understands that although you have a limited time in business, you’re strong in the other important areas like credit, cash flow, profitability and business durability.

Things within the control of the small business owner

Business Credit

A major factor in obtaining the best small business loan is to have strong business credit. Not only will obtaining a small business loan, with a positive payback history to follow, help improve a business credit score but so will another factor. The largest contributing factor for many businesses is vendor debt. A business owner with a strong history of paying vendors on time will qualify for much better terms than a merchant that is consistently delinquent. Keeping up with accounts payable is of great importance for obtaining a small business loan.

Cash Flow and Profitability

Having a positive cash flow is an overriding factor for many funding programs. A business that manages its cash flow well, including strong balances (beginning balance, ending balance, and daily balance), will be a less risky, more attractive investment. An underwriter will only approve a business for as much as that business can afford. The amount of money deposited into an account is not nearly as important as the amount of money that stays in the account. Bank account issues, such as excessive NSF (non-sufficient funds) transactions, overdraft transactions, returned checks and similar red marks on the bank statements will reflect very poorly on the business owner.

Ownership Structure (keeping clean records for proving ownership)

Some programs require very little in terms of how much stake a loan application has in a business. In other words, many programs require at least 51 percent of the ownership to agree to the terms of a loan but some as little as 1 percent of ownership. Regardless of the requirement, make sure the program for which a business is approved, lines up in terms of satisfying the ownership requirement. Also, make sure to have a clear document that will satisfy proof of ownership requirements. The most common of these documents come from the federal tax return in the form of a Schedule K-1 or Schedule C.

Credit’s effect on the ability to acquire a small business loan

Generally speaking, a 700-credit score or better, puts any individual in line to obtain top tier funding. This is true whether we are referring to consumer credit or business credit; however, a credit score is not the only contributing factor. The previous sections of this article are based on addressing these other factors. In terms of small business loans, how does a 700-credit score change the likelihood of approval as well as the strength of the terms approves?

Not all 700 credit scores are alike. For example, lenders will look at various items like account history (how long has credit been established or re-established); number of trade lines (the number of open credit items); comparable debt (usually mortgages and car loans show similar, favorable type large credit amounts); and percentage of available revolving debt (funds to easily access in case needed on credit cards or personal revolving lines of credit). Better credit and a deeper history are reflected on a credit report, the more favorable the probable results. Also, a history of consistent payments on larger established credit lines is positive. Although debt is not always favorable, the ability to demonstrate a history of paying off debt and managing credit correlates with a strong personal credit profile.

Even though a loan might be based on the strength of the business, a business owner with a 700 plus credit score will be considered of higher creditworthiness. To go a step further a business owner with a 700 plus credit score, as well as a lengthy history of several trade lines and larger trade lines, will be considered one of the highest creditworthy individuals. This will be a positive reflection on the business in terms of being extended credit. As a result, it is paramount to manage credit and debt wisely to be in the best position to borrow funds for business at the best terms. The more money a business saves on interest, the more profitable a business will be, and the more money will be retained to invest in the growth of the business.

So, can I get a small business loan with a 700-credit score?

In short, yes; however, it is important not to assume the best product and the best terms will be made available to the business owner with the best personal credit score. A 700-credit score is only as valuable as a 400-credit score in business funding when the finances of the business are poorly managed. Conversely, a business owner with a 650-credit score but strong financial and banking documents will be in better shape than a business owner with an 800-credit score but lots of negative banking transactions or low daily balances. The 700-credit score will open the possibility to some programs but the bank statements and supporting financial documents will be the supplemental factors in the approval decision. The key is to control as much the decision as possible by managing personal credit, business credit, and finances. Therefore, putting the business and the business owner in a position of strength when exploring small business loan options.

Just as with any funding, credit is a vital part of the underwriting decision. A business loan is issued only to an operating business. As a result, the financial strength and creditworthiness of the business are primary considerations. It is important to keep in mind when we are referring to a small business loan, there is more of a connection between a small business owner or owners and the business than there are with larger organizations. Often, the small business is a part of the family of a business owner or owners. Due to this close relationship between the same business owner and the entity itself, personal credit plays a part in obtaining a small business loan, which is probably not the case with a large organization, and certainly not the case with a publicly traded corporation.

Having good credit for both business operations and personal life will always lead to more opportunity and greater growth. Besides building your business and personal credit, and making it solid, things like time in business, cash flow, revenue and other related facets of your business strong. Once these things are in order, you’ll be in a great position to be approved for an ideal small business loan.

At Crestmont Capital, we approve roughly 95 percent of our loan applicants. To learn more, click here to review all our small business lending options.