The Small Business Administration (SBA) loan works closely with small business owners or borrowers to provide financial resources borrowers need to purchase or repair real estate, equipment, machinery, or other assets. To qualify for an SBA small business loan, a small business owner must meet a general standard set by SBA or lenders. One of the requirements, though it’s not explicitly stated, is a healthy personal and business credit score. While it’s not impossible to get an SBA loan with a bad credit, having bad credit surely puts your business at disadvantage when you’re applying for an SBA small business loan.
Let’s look at how a bad personal or business credit score affects a small business owner’s ability to successfully get an SBA small business loan.
Personal Credit Score
The SBA hasn’t set a minimal requirement for a FICO score that you need to achieve to qualify for an SBA loan. The qualification for credit score varies entirely on the lender which is oftentimes a large financial institution such as Bank of America or Banc of California. The financial institution determines a specific credit score that a borrower must meet to acquire an SBA loan. Generally, you need a personal credit score of 640 for a lender to accept your SBA loan application. FICO Scores, which range from 300 to 850, are the credit scoring model most commonly used by lenders for evaluating a borrower’s creditworthiness. A FICO Score of between 640 to 719 is considered “good” by most lending standards. 720 to 799 is considered as very good and 800 or higher (maximum is 850) is considered as exceptional.
Bad Business Credit Score
Business credit score ranges from 0 to 100 or 0 to 300, depending on the credit score assessment model. Needless to say, the higher your business credit score, the more likely you can get an SBA small business loan. A higher business credit score indicates that you’re likely to pay your loan payments in a timely manner and you’re regarded as a more trustworthy or credible borrower. Conversely, bad credit score suggests that you’re less likely to make your loan payment on time or at all and you’re seen in a bad light.
There are several factors that affect your business credit score – the factors include:
Payment and credit history
Debt and your debt utilization rate
The risk associated with your industry
Size of your company (number of employees, annual sales, financial statement)
Prior to applying for a SBA 504 loan, it’s imperative for you to understand your current business credit score and opportunities to improve it. The top three credit bureaus you can check your business credit score are:
Some lenders also consider your FICO Small Business Scoring Service (SBSS) score, which uses a hybrid model and reflects your personal and business financial health.
Impact of Bad Credit on an SBA 504 Loan Terms
In addition to influencing the success rate of getting an SBA loan, your personal and business credit scores also impact your SBA loan terms such as the maturity period and interest rate. Poor credit score may extend your maturity period to minimize your monthly payment amount so you’re more likely to be capable of paying your monthly loan. Low credit score can also increase your interest rate because you’re a riskier borrower and the lender wants to mitigate its risk by charging you a higher interest rate.
It’s important to remember that when you’re applying for an SBA loan, you’re borrowing from a lender such as a bank and not SBA directly. The lender provides up to 50% of a project so the lender wants to assure that its borrower has the financial capability and courtesy to repay the loan in a timely manner.
Can a Small Business Get an SBA Loan with Bad Credit?
In short: yes. However, the answer to this question significantly depends on the lender. If the lender finds your business or personal credit score unacceptably low, your SBA loan application will not be approved and vice versa. However, if your business credit score is lower due to a one-time event or business crisis as opposed to frequently late on paying your loans, the lender may be lenient and open to approving your SBA loan.
Other factors that influence your ability to get an SBA loan include the number of years you’re in business. If you’ve been in business for a decade or more, you may still get approved even though your business credit score is lower. If you’re a new business or startup that doesn’t have a long history of track record, a lender is less likely to loan money to you. That said, you can increase your chance of obtaining a SBA loan when your business establishes a healthy payment history.
Overall, your chance of getting an SBA small business loan with a bad credit tremendously varies depending on the lender. If the financial institution is more conservative, you’re less likely to get an SBA loan with a bad credit. If you do get approved with a low credit score, your interest rate is likely to be higher than the interest rate of a borrower that has a high credit score.
How Can I Improve My Bad Credit Score?
There are several simple ways you can improve your bad credit score.
- Pay your bills on time. This is the easiest way to improve your business’ credit score. Paying your bills on time tells the lender that you’re a trustworthy borrower and will likely pay your SBA loan in a timely manner.
- Achieve a healthy debt-to-income (DTI) ratio of under 43%. Debt-to-income ratio is calculated by dividing your monthly expense by your gross income. For every $100 you earn in income, it’s ideal to keep your expense to under $43.
- Develop a feasible budget for your business to ensure that your business remains afloat and keeps a healthy cash flow so you can pay all your expenses on time.
Although it’ll take some time for your credit score to improve, it’s definitely better to start now than later. As your credit score improves, more lenders are willing to work with you and offer competitive interest rates.
If you have further questions about the question “can I get an SBA loan with bad credit”, please get in touch with Business Finance Capital via contact form or phone at 1-800-SBA-REAL (722-7325) and one of our lending experts will be delighted to answer all of your questions!