What Credit Score Should I Have to Secure a Business Loan?

Obtaining a loan can be the next big step for budding entrepreneurs who want to expand their ventures and navigate through challenging times. However, securing one isn’t just about having a great idea or a solid business plan; it also often depends on an individual’s creditworthiness. 

One of the primary metrics lenders use to assess this creditworthiness is the credit score. This begs the question: what credit score do you need to qualify for a business loan?

The Importance of Credit Scores in Business Loans

As mentioned earlier, credit scores measure an individual or entity’s creditworthiness. They indicate their likelihood of repaying borrowed funds; a higher credit score usually leads to better loan terms, including lower interest rates and higher borrowing limits. 

This score is calculated based on various factors, including: 

• Payment History: Timely payment of debts, including loans, credit cards, and bills, is a critical component of creditworthiness.
• Credit Utilization: Lower utilization ratios indicate responsible credit management and positively impact creditworthiness.
• Length of Credit History: Lenders prefer applicants with established credit histories, as they provide insights into past repayment patterns.
• Types of Credit Accounts: A diverse mix of credit accounts, including credit cards, installment loans, and mortgages, can enhance credit scores.
• New Credit Inquiries: Multiple inquiries for new credit within a short period may signal financial distress or excessive borrowing, potentially lowering credit scores.

Conversely, a poor credit score may limit access to financing options or result in unfavorable loan terms, such as higher interest rates or stricter repayment terms.

Minimum Credit Score Requirements for Business Loans

When securing a business loan, lenders assess applicants’ creditworthiness to mitigate the risk of default. Although credit score requirements vary among lenders and loan programs, certain benchmarks are generally observed. Banks and credit unions often impose stricter credit score requirements than alternative lenders.

For conventional bank loans, a credit score of at least 680 is often considered the minimum eligibility threshold. However, businesses may need a credit score of 700 or higher to qualify for the most competitive interest rates and terms.

Government-backed loans, such as those administered by the Small Business Administration (SBA), are more lenient. While the SBA doesn’t set a minimum credit score threshold, most lenders participating in SBA loan programs prefer applicants with scores exceeding 650.

Alternative lenders, such as online and peer-to-peer lending platforms, may be more lenient with credit score requirements, often accepting scores as low as 550. The same applies to most microloans offered to small businesses and entrepreneurs.

Other Factors Influencing Credit Score Requirements

• Type of Loan: Secured loans backed by collateral might have lower credit score requirements than unsecured loans, which rely solely on the borrower’s creditworthiness.
• Lender’s Risk Appetite: While some may be more conservative and insist on higher credit scores, others may be willing to take on more risk by lending to borrowers with lower credit scores, albeit at higher interest rates.

• Loan Amount & Term: Larger loan amounts and longer repayment terms typically require stronger credit profiles. Lenders may be more lenient with smaller loan amounts or shorter terms.

• Business Financials: A strong business credit profile, demonstrated by factors such as revenue, profitability, and payment history, can sometimes compensate for a weaker personal credit score.

• Collateral: Offering collateral, such as real estate or equipment, can mitigate the risk for lenders. This can potentially offset the impact of a lower credit score.

Strategies to Improve Your Credit Score

If your credit score falls below the threshold required for a business loan, don’t fret. There are several ways you can employ to enhance your creditworthiness over time.

Tip #1: Review Your Credit Report 

Obtain a copy of your credit report from each of the major credit bureaus—Equifax, Experian, and TransUnion. Review the reports carefully to identify any errors or inaccuracies that might be dragging down your score. Dispute any discrepancies and work towards resolving them. 

Tip #2: Make Timely Payments 

Your payment history is one of the most significant factors influencing your credit score. Make sure you pay all your bills, including credit card bills, loans, and utilities, on time each month. Setting up automatic payments or reminders can help you stay on track.

Tip #3: Reduce Credit Utilization

Keep your business debt levels manageable and avoid overextending your credit capacity. Use only a portion of your available credit to maintain a low credit utilization ratio. Lenders view high debt levels relative to available credit as a red flag.

Tip #4: Limit New Credit Inquiries & Applications 

Every time you apply for new credit, a hard inquiry is triggered on your credit report, which can temporarily lower your score. Apply only for credit when necessary and refrain from multiple inquiries within a short timeframe.

Tip #4: Diversify Credit Types 

A diverse credit portfolio comprising term loans, lines of credit, and business credit cards can strengthen your credit profile. However, avoid opening new accounts solely for diversification if they aren’t necessary.

Tip #5: Keep Old Accounts Open 

Closing old credit accounts can shorten your credit history and reduce the average age of your accounts, potentially lowering your score. Keep your older accounts open unless needed, especially if you’re not actively using them.

Tip #6: Establish Trade References

Building positive relationships with suppliers and vendors can benefit your business beyond procurement. Many suppliers extend trade credit arrangements, allowing you to purchase goods or services on credit with favorable payment terms.

Tip #7: Seek Professional Help

If you’re struggling to improve your credit score or navigate credit-related issues, consider seeking assistance from a reputable credit expert. They can provide personalized guidance and strategies to help you achieve your credit goals.

Final Thoughts

While there isn’t a one-size-fits-all answer to the question of what credit score is needed for a business loan, it’s clear that credit scores play a significant role in the lending process. These are a critical determinant of a company’s ability to secure loans and access favorable terms. Building good credit takes time and discipline, but the long-term benefits are worthwhile.

At NCH, our credit experts are dedicated to helping individuals and businesses address credit-related challenges and improve their financial standing. Whether you’re struggling with credit repair, debt management, or credit building, we provide personalized guidance and solutions to overcome these challenges and achieve financial stability.

Visit our website or call 1-800-508-1729 to schedule your free consultation! 

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.