Where taking a business loan can be very beneficial for you, the process is not so smooth. A business loan is the most popular source of investing in or taking capital for business, yet there are problems like long approval time, high-interest rates, etc. Another thing that usually worries people before taking a business loan is the impact of credit score on it. When you apply for a business loan, it will not take you long to realize that your personal credit impacts whether you qualify for taking a business loan or not.
Most business owners have misconceptions regarding their credit score for a business loan. They do know that there is significant effect of credit score on small business loans, but they do not know what the actual impact of credit scores is. They are unaware of what they can include in their profile to improve their chances of getting a business loan.
Why Do Lenders Need to Access your Credit Score
The following are the three most important considerations lenders make before granting a business loan:
- Are you able to repay a loan?
- How soon can you repay the loan?
- Will you make every payment even if something unexpected happens?
Your credit score for a business loan is sufficient enough to give the lenders insight into your previous financial decisions and will make fair assumptions about what you can do in the future.
Effect of Credit Score on Small Business Loan
The three major personal credit bureaus (Equifax, TransUnion, and Experian) slightly wary in ways to score your credit profile. But the general criteria are more or less the same. Here are the things you need to consider regarding your credit score for a business loan.
The ideal score most banks want to see is 700. For a business loan, a credit score below 680 can be problematic. But SBA loan requirement’s credit score limit is often less. SBA is usually willing to accept credit score with 650 thresholds. But in some cases 650 credit limits can have difficulty in qualifying for SBA business loan approval.
Many small business lenders online do grant business loans to those with a credit score of 600. Especially if you can demonstrate that you make your payments on time and have a healthy business running, you can get a small business loan on a low credit score. Keep in mind that you will get these types of business loans at a higher interest rate and with specific terms and conditions.
Your credit score shows you manage your personal and business credit responsibilities. Lenders evaluate your credit score for a business loan to determine your business creditworthiness. So it is crucial to make efforts to build your credit score to be as strong as possible.