Are you curious about the one reason most small business loans get rejected?
It’s not because of the business plan.
It’s not the revenue forecast.
It’s not the lack of experience in your industry.
Truth bomb:
Let’s start with the cold hard facts. Business credit is why 20% of small business loans get rejected outright. Your credit score is a number lenders look at first. A bad score can sink your application before they even read your loan request.
If you’ve heard any of this before, you might be wondering what we’re getting at. Credit scores are important. We get it.
But, here’s the secret most business owners don’t know…
There are not one but two different credit scores lenders look at when you apply for business funding. The type of credit score they prioritize and the exact score you’ll need can make the difference between approval and rejection.
In this article, you’ll learn:
- The Role of Credit Scores in Loan Approval Odds
- Two Credit Scores You Need to Know
- Minimum Credit Score Requirement by Lender Type
- Best Strategies to Improve Approval Odds
The Role of Credit Scores in Loan Approval Odds
Credit scores aren’t just a random list of numbers on a report. They are a business’s financial report card that tells lenders if you are worthy of their money.
Lenders take them seriously, and here is why:
Did you know:
Small businesses with low-credit risk (720+ FICO score, 80+ business score) see an approval rating of 83% at small banks while medium and high risk struggle at just under 50%.
Imagine that when your business applies for small business loans the majority of the time.
Why do credit scores play such an important role in approval odds?
Credit scores are predictive. They give lenders an idea of whether or not your business will be able to meet repayment obligations. If you couldn’t manage to pay your personal debts in the past, they believe your business won’t be any different.
Facts are facts.
Fortunately, now that you know exactly what lenders look at, you can put yourself in a position to succeed.
Two Credit Scores You Need to Know
It might surprise you to learn that personal credit scores aren’t the only scores that lenders look at when you apply for business funding.
Most business owners only focus on their FICO score.
Big mistake.
The truth:
Personal Credit Scores
FICO scores range from 300 to 850 and evaluate your financial history in a few areas over a period of time.
Credit cards, car loans, mortgages, and other personal debts are a few of the areas lenders pull credit reports from to determine your score.
Remember, we said that most lenders will heavily focus on personal credit history. Here is why that is the case. Many small business owners personally guarantee their business loans, and lenders see this as an additional risk if your personal credit score is poor.
Business Credit Scores
Business credit scores are separate and distinct from personal credit. Credit bureaus such as Dun & Bradstreet, Experian, and Equifax calculate business scores.
If your first reaction to this is: “Wait, which one is right, what do I report, and why do they have different ranges?”
You are not alone.
Each of these agencies reports business credit differently. Dun & Bradstreet reports a range of 0-100. Experian 1-100. Then there is the FICO Small Business Scoring Service, which ranges from 0-300.
The problem is business owners expect the credit bureaus to work together the same way personal credit bureaus do. That is simply not the case.
The real scoop: Many small businesses don’t have an established business credit score, and this is not at all uncommon. In fact, it is to be expected when you are just getting your business off the ground.
The good news is this is exactly what lenders expect.
Instead, they will shift their weight and require a personal guarantee for your business funding.
Minimum Credit Score Requirement by Lender Type
The great news is that lenders aren’t a monolith. Let’s look at exactly what each one of them typically require for you to be considered:
Traditional Banks
Big Banks are the hungriest when it comes to credit scores and other qualifying factors. You can typically expect banks to want to see the following:
- Personal credit score of 680 or higher (more often lenders want to see 700+)
- Business in operation at least 2 years
- Annual revenue of $250,000 or more
- Collateral (collateral)
If all of the boxes are checked, you can qualify for the best interest rates and repayment terms.
SBA Lenders
SBA loans are partially guaranteed by the government, so while lenders are more picky than online options, they can relax their credit score and revenue requirements.
Most SBA lenders will look for the following criteria:
- Personal credit score in the 620-680 minimum range
- FICO SBSS score of 155+ for loans under $500,000
- Business in operation 2+ years
- Down payment (smaller than traditional banks)
Online Lenders
If you have less-than-perfect credit and revenue, online lenders are your best option. Online lenders can offer:
- Personal credit score as low as 500-550
- Faster approval (sometimes within 24 hours)
- Less documentation
- Higher interest rates (trade-off for approval)
Alternative Lenders
Alternative lenders place less emphasis on credit score and more on business performance. Options include revenue-based lending, asset-based loans, and merchant cash advances.
Not too shabby, huh?
The most important thing to remember is that you should match your credit profile to the right type of lender based on your business’s unique needs and qualifications.
Best Strategies to Improve Approval Odds
So you want to improve your chances of getting that funding your business needs. Here are the winning strategies that will help:
Improve Your Personal Credit Score First
If most lenders will take a close look at your personal credit report, then it should come as no surprise that this is a great place to start.
- Pay everything on time (Payment history makes up 35% of FICO)
- Lower your credit utilization ratio (Keep credit card balances low)
- Don’t apply for new credit (lower your score)
- Check your reports for errors (dispute if necessary)
Build Business Credit Score
If you don’t have any established business credit score don’t fret. You can start building yours by doing the following:
- Get an EIN (Employer Identification Number)
- Open a business bank account (keep personal and business accounts separate)
- Use business credit cards (pay on time)
- Work with vendors that report (request to report your payment history)
Choose the Right Lender
Stop applying to lenders that won’t approve you. You have better things to do. Instead, do the following:
- Research the minimum requirements first
- Start with a relationship bank (one you have existing accounts with)
- Consider alternative funding
Put Strong Documentation Together
Lenders want to see you’re not a fly by night operation. Help them out by doing the following:
- Financial statements (profit & loss, balance sheets)
- Tax returns (personal and business 2-3 years)
- Bank statements (3-6 months of business and personal)
- Business plan (description of use of funds)
Fun fact: Preparation matters to lenders.
Consider Getting a Co-Signer
If your credit is not where it needs to be, it can help significantly if you have a co-signer with excellent credit.
Wrapping Up
Credit scores play a significant role in small business loan decisions. However, they are far from the whole story.
Here’s the bottom line:
Your personal credit score matters more than you think even if you are applying for a business loan. The personal FICO score is heavily weighted and examined by most lenders, especially if your business is new.
Different lenders require different minimum credit scores, revenue, and other qualifying factors. Banks have the strictest requirements, SBA lenders fall in the middle, and online lenders are the most flexible of them all.
You have more control than you realize. By improving your credit scores, choosing the right lenders, and preparing strong documentation, you can dramatically improve your odds of loan approval.
The bottom line?
A low credit score is not a death sentence for your business funding applications. Don’t stop before you start. Understanding how the game is played gives you the advantage over most business owners who jump into the funding ring blind.
Focus your energy on strategies that move the needle, match your credit profile to the right lenders, and know that funding options are available for all credit levels.
