Minimum Credit Score for Business Loans: Answers and Options

Securing a business loan can be a crucial step for entrepreneurs looking to start or expand their businesses. However, one of the significant hurdles many face is meeting the minimum credit score requirements set by lenders. Credit scores play a pivotal role in the loan approval process, influencing both eligibility and the terms of the loan.

Let’s explore the minimum credit scores required across different lenders and loan types, and the options available for those with lower credit scores.

What Credit Score Do You Need to Get a Business Loan?

The credit score needed to secure a business loan varies depending on several factors, including the type of lender, the loan amount, and the specific terms of the loan. Generally, a higher credit score increases your chances of approval and access to better loan terms.

Here’s a rough guideline for the personal FICO credit scores typically considered:

Excellent credit (720 and above). With an excellent credit score, you can usually qualify for the best loan products with the most favorable terms.

Good credit (680 – 719). Most lenders will typically approve your loan application, though the terms might not be as favorable as those for excellent credit.

Fair credit (620 – 679). You may still qualify for a business loan, but your options will be more limited, and the interest rates will likely be higher.

Poor credit (below 620). Securing a traditional business loan in this range can be challenging, but alternative lending options might be available.

Minimum Credit Score by Lender Type

Different lenders have varying criteria for assessing creditworthiness. Here’s a breakdown of the typical minimum credit score requirements by lender type:

Traditional banks. Typically, banks require a minimum credit score in the “good” to “excellent” range starting around 680. Banks tend to have stringent lending criteria and prefer working with borrowers with strong credit histories.

Credit unions. Credit unions might be slightly more lenient than traditional banks, with minimum credit score requirements in the “fair” range — around 650.

Online lenders. These lenders often cater to borrowers with lower credit scores, with some requiring minimum scores as low as 600. However, this flexibility usually comes with higher interest rates or fees. As with any type of credit, the lower your score — the less likely you are to be approved.

Alternative lenders. For those with credit scores below 600, alternative lenders may be an option. It might mean a secured type of business funding, with which collateral is required. These lenders focus more on the overall health of the business rather than just credit scores.

Minimum Credit Score by Loan Type

Different types of business loans also have varying credit score requirements:

Term loans. Typically offered by banks and online lenders, business term loans generally require a minimum credit score of 600 – 680.

Lines of credit. Business lines of credit usually require a credit score of at least 620.

Invoice factoring. Invoice factoring can be more flexible with credit scores, sometimes approving scores as low as 500. This is because the business sells its invoices to a factoring company, which provides them with a form of collateral.

Merchant cash advances. These advances don’t usually have a strict credit score requirement but rely more on business revenue and sales history.

Equipment loans. By pledging purchased equipment as collateral, borrowers with scores as low as 550 may be able to secure equipment loans.

Do SBA Loans Have a Minimum Credit Score?

The Small Business Administration (SBA) does not set a specific minimum credit score for its loans, although they do require a business to be creditworthy. Most SBA-approved lenders look for a score of at least 620 to 640. The SBA 7(a) loan program, one of the most popular, often requires a minimum credit score of 650. However, because SBA loans are partially guaranteed by the government, lenders have some flexibility and may consider other factors such as business revenue and the overall financial health of the business.

Can I Get a Business Loan with Bad Credit?

Securing a business loan with bad credit can be challenging, but it is not impossible. Lenders will scrutinize other aspects of your business, such as cash flow, revenue, and the length of time you’ve been in business. Additionally, providing collateral or a personal guarantee can often increase your chances of approval.

How Does My Personal Credit Score Impact My Ability to Secure a Business Loan?

For small business owners, personal credit scores often play a significant role in the loan approval process. Lenders typically review both your business and personal credit histories to assess your creditworthiness. A high personal credit score can compensate for a lower business credit score, and vice versa. Here’s how your personal credit score impacts your loan application:

Risk assessment. Lenders view personal credit scores as a reflection of your financial responsibility and risk level.

Loan terms. Higher personal credit scores can result in more favorable loan terms, including lower interest rates and longer repayment periods.

Approval odds. A strong personal credit score increases your chances of loan approval, especially for startups or businesses without a substantial credit history.

Borrowing Options for Small Businesses with Low Credit Scores

If you have a low credit score, you may still have borrowing options. While these options might come with higher interest rates and less favorable terms, they can provide the necessary capital to grow your business. Here are some of the most viable options:

Bad credit business loans. Specifically designed for borrowers with poor credit, so-called “bad credit business loans” typically have higher interest rates and shorter repayment terms. Lenders focus on business performance, revenue, and other financial factors rather than just credit scores.

No credit check business loans. The term “no credit check business loan” typically refers to a type of business funding that uses an alternative credit check or just a soft credit inquiry. They do not require a credit check to determine approval, making them more appealing to those with poor or no credit history. Instead, lenders may look at your business’s cash flow, revenue, and time in operation. However, these loans often come with very high interest rates and fees.

Merchant cash advances. With a merchant cash advance, you receive a lump sum in exchange for a percentage of future credit card sales. Approval is based more on sales volume than credit scores, making it a viable option for those with low scores. However, the cost can be significantly higher than traditional loans.

Equipment loans. These loans are secured by the equipment being purchased, which serves as collateral. This reduces the lender’s risk and can make it easier to get approved even with a lower credit score. Interest rates and terms vary with equipment financing, depending on the value and type of equipment.

The Bottom Line

Navigating the world of business loans with a low credit score can be challenging, but understanding your options and the requirements of different lenders and loan types can help you find the right solution for your business needs. Improving your personal and business credit scores over time can open up even more favorable financing opportunities, helping your business grow and thrive in the long run.