If you understand how your personal (aka consumer) credit scores work, you have a good idea of how business credit scores work.
But finding the right business loan for you personally can feel daunting if you don't understand what credit scores you need to qualify. And what happens if you don't qualify because your personal credit scores are extremely low?
This guide will explain what goes into a business credit score, the minimum credit rating requirements for different types of business financing, financing options for low credit ratings and tips to help you improve your credit rating scores to get the funding you need.
What Is Business Credit?
A business credit history is sort of a report card of your business's history managing different kinds of credit and debt – for example charge cards, loans, vendor accounts and contours of credit. Your business credit reports could also have a business profile with details like the year your business started, how many employees you've and its financial information.
The three major business credit bureaus are:
- Equifax(R) Business
- ExperianTM Business
- Dun & Bradstreet CreditMonitorTM
Each credit rating agency collects data and helps to create a credit history based on its credit scoring models.
Not all lenders, creditors and suppliers will report business activity to the business credit bureaus. But because reported business activity can help you construct your business credit, it might be in your best interest to inquire about these to report business activity.
Business credit scores
Business credit ratings are calculated using the information on your company credit history. Each business credit agency features its own credit scoring model, and you may see several credit ratings on your business credit history, including:
- Dun & Bradstreet PAYDEX or Equifax(R) Payment Index: Companies get a score from 1 – 100 that rates their payment history. Paying early can boost your score; late payments will lower it.
- Business creditworthiness (Credit Risk Score or Delinquency Predictor Score): The scale for this score varies by credit agency. The score, which works similar to an individual credit rating, estimates the chance that the business will end up severely delinquent on payments in the next Twelve months.
- Business failure (Financial Stability Score): The scale for this score varies by credit bureau. It estimates the probability of a business failing or experiencing severe bankruptcy within the next Twelve months.
You may also come across something known as the FICO(R) Small Business Scoring Service (SBSS) score. FICO(R) SBSS scores range from 0 – 300. It might not be essential for watch loan application, but you will need it if you are applying for a small company Administration loan.
Some from the factors which go into calculating your business credit ratings are payment history, accounts (past and present), credit utilization, business age, public record information (like bankruptcies or collections), value and demographic data.
Why Is Your Credit rating So Important to Lenders?
Your credit rating is an indication of methods responsible you're debt relief and credit. As a business owner, your personal credit might be tied to your business depending on your business structure.
Since lenders don't know you personally, they appear at your scores and credit history to assist them to determine your reliability as a borrower and see how stable and/or successful your business is.
Lenders understand that some businesses, like startups or sole proprietors, may not have business credit reports or scores. This is another reason why lenders rely heavily in your personal credit score to create their lending decision, so you don't always require a business credit rating to obtain a small company loan.
What Is the Minimum Credit Score for Business Loans?
While there are ranges of credit scores that are considered much better than others, technically, there's no universal minimum credit score requirement for loans. Each lender has their very own credit rating requirements in line with the loan you're applying for and if they're looking at your business and/or personal credit, so make sure you check your eligibility before you apply.
Generally speaking, an individual credit rating of 670 or higher and a business credit rating of 80 or more will get you better loans. But let's break down the credit score ranges:
- Low credit risk: A business credit score from 80 – 100 along with a personal credit rating of 740 or more are considered very good-to-excellent scores and can likely get you any loan are applying for.
- Medium credit risk: A business credit score from 50 – 79 along with a personal credit score of 640 – 739 are thought good and you will likely have more favorable loans.
- High credit risk: A business credit score from 1 – 49 along with a personal credit rating below 640 are thought fair to poor. With a bad credit score, you will find that you're ineligible for many loans. Alternative financing options that do not require a credit assessment can be a better option.
Keeping the ranges in your mind, let us take a look at the different kinds of loans you can get as well as their credit score requirements.
Small Business Administration (SBA) loans
SBA loans are a type of term loan offered by lenders through SBA loan programs. Because SBA loans are government-backed loans, lenders can provide loans to entrepreneurs and smaller businesses that may well be ineligible for other loans. SBA loans include other perks like high loan amounts, long repayment periods and low interest rates.
SBA loans posess zero specific minimum credit score requirement, but lenders will set their very own requirements. Since these loans are extremely competitive, lenders typically look for excellent credit ratings:
- A personal credit score with a minimum of 680 – but 720 is ideal
- A business credit score of at least 80 or a FICO(R) SBSS score with a minimum of 155
Lenders could also consider the personal credit ratings associated with a co-owner(s) that owns at least 20% of the company.[1] This is because the SBA requires these to sign an individual guarantee, making the signer personally accountable for repaying the borrowed funds whether or not the business can't.
Term loans
Term loans offered by lenders that aren't backed through the SBA will have their own minimum credit rating requirement by lender and loan type. The borrowed funds terms might not be as favorable as SBA loans, but they're still good options.
You could find these loans have stricter requirements than SBA loans. Lenders generally prefer:
- A personal credit rating above 700
- A business credit score nearer to 100
That being said, some lenders will work with borrowers with poor credit, so don't count yourself too much in that case. You may even find that online lenders convey more relaxed requirements than brick-and-mortar banks, so your research before you apply. Just realize that lower credit scores usually include higher interest rates.
Equipment financing
Equipment financing uses the equipment you need to purchase as collateral for your loan, but lenders still require a credit assessment. Since the loan is backed by collateral, lenders may accept lower credit scores than if you applied for a personal unsecured loan to purchase the gear.
Lenders typically look for:
- A personal credit rating of 630 or higher
- A business credit rating close to 40 or higher
How Can You Enhance your Business Credit ratings?
If your credit ratings are too low to entitled to the financing you would like, you will find things you can do to enhance your credit ratings. (Their list pertains to both business credit scores and personal credit ratings.)
- Monitor: Check out your credit scores and credit history to see what needs work.
- Dispute: Dispute errors in your credit report with the responsible credit agency.
- Pay debts: Repay your existing debts as soon as you can to take down credit utilization (many of scoring models). Consolidate debt or negotiate new loan terms with lenders to make debt repayment more manageable.
- Make on-time payments: Paying your bills promptly is probably the most important step to enhancing your credit scores.
- Borrow responsibly: Keep business charge card balances low moving forward and don't borrow more than you really can afford to repay.
- Diversify credit: Although credit mix doesn't take into account much of your score, it can help improve your scores in addition to managing your credit responsibly (aka keeping your utilization low and paying on time).
- Build credit: Build credit by just as one authorized user on a credit card, obtaining a credit builder loan, getting a secured charge card or opening new tradelines (aka credit accounts) with vendors, suppliers and lenders.
- Increase business revenue: This is more for the business credit rating than your personal, but upping your revenue and demonstrating financial stability might help boost the Financial Stability Score of your business.
Continue to watch your credit history and scores often. Catching errors early may help prevent your scores from dropping unnecessarily.
Can You Get a Business Loan With no Credit Check?
If you need to obtain a business loan without a credit check, your options are limited – but there are some ways you can the funding you'll need. You might find that a few of these options come with higher fees, interest rates and annual percentage rates (APRs) than traditional loans.
- Invoice financing: It's a short-term loan that lets businesses take a loan against outstanding customer invoices. The invoices are utilized as collateral. The company is still accountable for collecting money using their customers and should repay the borrowed funds even when their customers don’t pay their invoices.
- Invoice factoring: This is similar to invoice financing. A lender will get your outstanding invoices and pay out a percentage from the amount upfront. The lender gets control collecting unpaid invoices and pays you the difference once they've received payment out of your customers.
- Inventory financing: This is really a short-term loan or line of credit that permits you to purchase inventory for your business to sell later on. The inventory is used as collateral for the loan.
- Merchant cash advance: This is the business version of pay day loans. It is a method to quickly borrow (and pay it off) money against future sales but it come with very high fees. These are considered a risky option.
- Crowdfunding: You can use crowdfunding to receive funds from friends, members of the family as well as total strangers. You are able to enhance the cash on your own, or someone else may raise it for you. Just be sure you keep records of methods much you receive. That which you make can be viewed as taxable income.
Sometimes Clients are Personal
Credit scores are among the most important factors lenders consider when you're trying to get a business loan. But it's only one piece of your business's financial puzzle. Lenders will appear in the bigger picture if they are making their lending decision.
Remember, there isn't one minimum credit rating that pertains to all loans, and your personal credit rating is usually weighed more heavily than your company credit score. Read lender requirements carefully to determine what scores you have to entitled to the loan you would like. The higher your credit scores, the more loan options you will have.
