When starting a business or expanding an existing one, most entrepreneurs will need access to capital. One option to finance your venture is through a business loan. However, not everyone may be eligible for such financing. One of the most important factors that can determine if you qualify for a business loan is your credit score.
What is a Credit Score?
Your credit score is a three-digit number that reflects your creditworthiness. It is calculated based on a variety of factors, including your payment history, the amount you owe, the length of your credit history, and the types of credit you use. The most commonly used credit score is the FICO score, which ranges from 300 to 850.
Why is Credit Score Important for a Business Loan?
Your credit score is a major component of your business loan application because it provides lenders with an indication of your likelihood to repay the loan. Lenders use credit scores to assess the risk level of lending to you. If you have a low credit score, lenders may view you as a high-risk borrower and be hesitant to lend you money. On the other hand, if you have a high credit score, lenders may view you as a low-risk borrower and be more willing to lend you money.
What is The Minimum Credit Score for Business Loan Eligibility?
There is no universal minimum credit score requirement for business loan eligibility. Each lender has its own credit score requirements and evaluates other factors in addition to credit score when making a loan decision. However, there are general thresholds and ranges that give you an idea of what credit score may make you eligible for certain types of business loans.
For bank loans, the minimum credit score required to be eligible for a loan typically ranges from 680 to 720. If your credit score is lower than this, you may not be eligible for a bank loan. However, you may still be able to obtain a loan from a non-bank lender, such as an online lender or a microlender. Some of these lenders may accept credit scores as low as 500, but interest rates may be higher and loan amounts may be smaller.
For government-backed loans, such as Small Business Administration (SBA) loans, the credit score requirement is usually lower than for traditional bank loans. For example, the SBA sets the minimum credit score for its 7(a)-loan program at 640. However, even if you meet the minimum credit score requirement, you still need to meet other eligibility criteria, such as having a strong business plan and being able to demonstrate repayment ability.
For alternative lending options, such as merchant cash advances and invoice factoring, credit score is usually not the only eligibility criterion considered. These lenders often focus more on your business revenue and cash flow. Therefore, if you have a low credit score but generate consistent revenue, you may still be eligible for alternative financing options.
How to Improve Your Credit Score for Business Loan Eligibility
Having a good credit score is important for business loan eligibility. If your credit score is below the minimum requirement for a loan, you may want to take steps to improve it. Here are some tips to help improve your credit score:
1. Pay Your Bills on Time
Late payments lower your credit score, so it’s essential to pay your bills on time. If you have missed payments in the past, get back on track by paying your current bills on time.
2. Keep Your Credit Card Balances Low
High credit card balances can hurt your credit score. Aim to keep your balances below 30% of your credit limit.
3. Don’t Close Old Credit Card Accounts
Closing old credit card accounts can lower your credit score. Even if you don’t use the account, keep it open to maintain your credit history.
4. Check Your Credit Report for Errors
Mistakes on your credit report can hurt your credit score. Review your credit report regularly and dispute any errors you find.
Conclusion
Your credit score is an important factor in determining your eligibility for a business loan. While there is no universal minimum credit score requirement, each lender has its own credit score requirements and evaluates other factors in addition to credit score.
If your credit score is below the minimum requirement for a loan, you can take steps to improve your credit score, such as paying your bills on time and keeping your credit card balances low. By understanding your credit score and taking steps to improve it, you can increase your chances of qualifying for a business loan.
