There is not necessarily a specific cutoff number that marks whether you can get a small business loan or not. Business lenders do, however, like to see higher credit scores. Each loan application is evaluated on an individual basis. Prospective borrowers are approved or denied based on a variety of factors. If your credentials (including, but not limited to, credit score) meet or exceed the lender’s other standard requirements, then lenders will be inclined to approve you for most small business loans.
Before we answer the main question, let’s explore the two types of credit scores. These are used in determining qualification for small business loans.
Business Credit Score:
The first type of credit that lenders consider is business credit. There are different scoring methods, reporting agencies, and scoring systems used. Business credit score is a numerical value given to describe the creditworthiness of any business. The score is determined greatly in part to the payment history of a business. Accounts used to determine the business credit score include utilities, vendors, credit cards, loan history and any other debt that belongs to the business.
Consumer Credit Score:
Consumer credit score (or personal credit score) is a numerical value given to individual consumers based on their creditworthiness. Factors that are examined in determining this number include home loans, auto loans or leases, and consumer loans such as credit cards. Other items such as tax liens and collections are used in calculating personal credit score. Scores range between 350 and 850. A stronger payback history and length of accounts will help increase a consumer credit score. Personal credit scores, and credit scores, in general, are a measure of how financially reliable and trustworthy you are. The better your credit score, the better your eligibility for good loans.
What Roles Do Credit Scores Play in Getting a Small Business Loan?
What kind of credit is used for a small business loan?
When applying for a small business loan, it is likely that the lender will examine the credit history of both the business and the business owners. 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.
Is Business Credit important in obtaining a small business loan?
Business credit is an important factor in obtaining a small business loan. Every loan program that offers credit to businesses will look at the credit score of the business unless the business is quite new. Many programs have their own scoring models. What is most important is having a solid and responsible financial history with your business.
The best thing a business can do is pay the bills. While this may sound obvious, most small business owners do not realize that past dues and unpaid bills are tracked similarly to overdue bills are used to calculate a consumer credit score. It is common to think of credit as mortgages, car loans, student loans and credit cards. Consumers are not typically tracked on their payment history with things like their gardener or utility companies; however, businesses do have their history tracked in these areas.
Just like with consumer debt, when a business is trending downward, when there are increasingly past-due periods on an expanding number of accounts, a business is scored lower. Many small business loan programs will not approve an otherwise strong business if there is a payment history on business accounts trending in the wrong direction. If a business is over 90 days late to a vendor, they decrease their chance of being approved for a small business loan and will be subjected to terms reflecting a riskier loan.
Is consumer credit important in obtaining a small business loan?
The answer is yes, but it’s not critical. Consumer credit can be used to determine the creditworthiness of a business owner who is looking to obtain a small business loan. The industry trend is that better products and terms will be offered to those who have a strong individual credit history as well as good business credit. Still, programs exist which do not look at consumer credit scores from any consumer credit bureau. These bureaus generally include Equifax, Experian and Transunion. Even though a program doesn’t look at credit score, the underwriter is likely to consider items such as mortgage and auto payment history, as well as the availability of revolving (credit card) credit.
When it comes to offering credit with a small business loan, many different items are used by a lender to calculate risk. A lender will use every tool at their disposal to predict the risk of lending to a business. These tools included both business credit scores and personal credit scores. The history of the business owner, as well as the history of the business, will be used in the underwriting decision process. The better a small business owner does in maintaining positive business and personal credit, the more opportunities the business owner will have access to regarding small business loans. A financial history will make a lender feel more at ease when offering credit, especially unsecured credit. If you’re struggling with keeping your personal credit score up, it’s a good idea to work on improving it before applying for a loan.
What is the role of consumer credit used for regarding small business loans?
Consumer credit can be used in two primary ways when underwriting a small business loan request. It can be used to look at the behavior of the business owner. Underwriters will want to know if the business owner pays their personal bills. They’ll also research if the individual is late or punctual on payments. Consumer credit can also be used to track current trends. They’ll look to see if the individual is stretched for credit.
What is the role of business credit used for regarding small business loans?
A small business loan underwriter will want to use business credit by examining the amount of debt serviced. A small business loan will also look at payment history and current trends in debt use and payments made on that respective debt. The goal in mind is to see if there are any red flags on the credit history of is the business credit history is a strong indicator of limited risk.
Many small businesses have debt that is not traditional to consumers. This will include items like equipment financing and other business loans or funding. The debt-to-income ratio, or the portion of revenue being used to pay creditors, becomes an important factor. An underwriter needs to be comfortable that a business can afford the payment and is not becoming over-leveraged. If a company has too much debt, affordability becomes a grave concern. At the same point, a business with a low debt-to-income ratio is a much less risky proposition for the lender of the small business loan.
Payment history is the most obvious factor. A company with a history of making payments on time is probable to make loan payments on time as well. This reduces the risk score of that business. In theory, even struggling to pay the electric bill is a strong indicator of financial stress; however, a business that pays its vendors and utilities on time is probably managing its cashflow very wisely. Other areas such as defaults or successful paybacks are illustrated through the payment history.
Recent trends in business credit are vital for determining eligibility for small business loans. A company with recent past dues is likely struggling with cashflow. This does not preclude a business from obtaining funding but will raise red flags. A small business loan program is designed more for growth and less for taking on an already strained financial burden. We do not want to see one unaffordable debt being a trade for an equally unaffordable debt. Many times, a small business is stressed for cash flow due to growth. In this case, an underwriter may want to see Accounts Receivable reports and a Profit & Loss Statement to find out why the business is struggling to keep up with its obligations.
So, what is a good credit for a small business loan?
The answer is not as simple as stating a number, but that is a good thing! A program that will examine the entire picture is better than an automated program that uses a minimum cut-off in terms of credit score, either business or consumer. A small business loan program understands that complex decisions are made daily when operating a business. Many times, these decisions are related to finance and credit.
Often a business owner will sacrifice their personal financial situation to keep funding their business, but it’s important to try and balance these two to one’s best ability. It’s alright if both scores are okay, but it’s risky if one is somewhat poor and one is good.
The faster a company grows, so does its bills. The first issue, on a micro-level, is that growth will outpace the speed at which receivables are being collected. The second issue, on a macro level, is that a growing economy will have a trickle-down effect on every level where terms were extended. If the slow payment of financial obligations is a result of a growing business in a growing economy, there is much less concern for the risk of issuing a small business loan.
The Bottom Line
At the end of the day, when searching for a small business loan, it is most important to find a product for your company and situation. Certain small business loans are more lenient in their qualifications than others, but you’ll have to sacrifice ideal terms and conditions. They go on a gradient from difficult to attain to relatively easy. The strength and creditworthiness of a business owner and their business will result in more options and better terms.
What is a good credit score for a small business loan? A general range would be a more appropriate answer: roughly 850 to 661. To echo a recurring but true theme in our articles, the better someone is a paying their bills, the better results they will have in finding a small business loan.
Crestmont Capital offers a wide range of financing options. We approve roughly 95 percent of our loan applicants. To learn more, click here to review all our small business lending options.