What’s a Good Credit Score for a Small Business Loan?

Discussion in 'Entrepreneurship' started by dealmaker, Dec 21, 2018.

  1. dealmaker


    What’s a Good Credit Score for a Small Business Loan?
    Dec 20, 2018 by Gail Gardner In Small Business Advice1

    Do you know what your business credit score is? No, not your personal score – yourbusinessscore. Unfortunately, many small business owners are not aware of the importance of building their business credit score.

    Even if you do not anticipate the need to borrow money for your small business, it is still important to start building your business credit score now.

    Rania Succar, head ofQuickBooks Capital, explainswhy your business credit score matters:

    “More than half of small businesses have not built a business credit score. And when you go to borrow, that can really hurt you in terms of what you can get.”

    What is a Good Credit Score?
    Unlike personal credit scores which are calculated in a uniform manner, each business credit score has a different range and uses different criteria.

    Business credit scores can be used to decide how safe it is to extend credit to customers or check the stability of vendors. Here aresome guidelinesfor a good credit score for the above types:

    To qualify for a business loan, most lenders require a minimum 550+ personal credit score.

    SBA Loan:
    Small businesses arepre-screened for SBA Loansusing the FICO® SBSS? Score. The minimum required by SBA is 140, but many banks set a higher minimum of 160.

    This is significant because a perfect personal consumer credit score generates a FICO® SBSS? Score of only 140. So without a business credit score, a small business has almost no chance of obtaining an SBA loan.

    A minimum personal credit score of 600-650+ is needed to qualify for an SBA loan.

    How to Start Generating a Business Credit Score
    Filing a DBA or obtaining a business license does not start your business credit file. Forming an LLC or corporation, opening a business bank account in your legal business name or having a listed telephone number in that name will create a business credit file.

    Free methods for establishing a business credit file include:

    • Applying for a federal Employer Identification Number (FEIN) from the IRS
    • Obtaining a Dun & BradstreetDUNs number
    It is critical to always use exactly the same form of business name and the same exact address and phone number on everything you do for your business.

    Create a place to keep that information and refer to it every time. This is critical for your business score and also for SEO rankings and branding and marketing your business.

    Tips for Improving Your Business Credit Score
    Now that you know how important your business credit score is to the future of your small business,use these tips to improve it:

    • Correct errors on your credit reports
    • Use auto-payments and reminders to pay your bills on time
    • Open a business credit card
    • Pay off existing debts, but donotclose the accounts
    Your goal is to use a low percentage of your available credit, ideally only 2-3%.

    According to Forbes: “In June 2011, small business financing approval rates at big banks was a paltry 8.9 percent. Today, big banks are granting 25.9 percent of the funding requests they receive, according to theBiz2Credit Small Business Lending Index™(May 2018 figures). ”

    By improving your business credit score, you improve your chances of being among those successful in finding financing to grow.

    Photo viaShutterstock

  2. As a practical matter, lbusiness lenders will use the personal credit score and credit profile of the business owner, the owners personal guarentee for the business loan, and if the loan makes financial sense for both parties. Lenders will typically ask for two years business tax returns with updated financial statements. In addition, underwriting will typically ask specific questions of the owner to get a sense of their business acumen before making a lending decision. The Small Business Administration (SBA) provides partial business loan guarentees to lenders, encouraging banks to lend. The SBA has specific requirements that business owners must comply with before they can be approved. These requirements include educational programs and a well written business plan. Minorities, women, veterans, and certain business products and services can be given special consideration by the SBA.

    One can establish business credit by opening business credit cards, business lines of credit, and business installment loans such as equipment loans. A business with 5 credit accounts that includes a business installment loan, has no derogatories, an average age of accounts(AAoA) of at least 24 months, and credit line utilization of below 19% would have a fairly strong business credit profile. Chase and American Express have a popular and strong business credit card products. Wells Fargo has great rates on Business lines of credit(BLOC) and equipment loans. In addition, Wells Fargo offers a secured business credit card and secured credit line for “thin” files or for the credit challenged. For commercial estate mortgages and other business loans, it pays to be well organized and prepared before shopping around for the best rates and terms.

    Much of the above criteria for a strong personal credit profile applies with additional weight given to number of credit report inquiries (Hard Pulls) in the last 6, 12, and within 24 months. Note: A inquiry no longer dings your credit score after 12 months, but some lenders will still consider the number of inquiries within the last 24 months. Age of youngest account(AoYA) is strongly considered by most lenders. Ideally, unless a thick, well-established file has been developed, one’s AoYA should be at least 6 months before applying for new credit. 12 months is better and 24 months or more is best for easiest qualifying, highest initial credit lines, and more favorable terms.
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