Business Loan Requirements - Best Loan Types for Bad Credit Scores

Business Loan Requirements - Best Loan Types for Bad Credit Scores

It is no big secrets that the personal and business credit scores of the borrower are the most important determiner of all business loan requirements. Lenders see credit scores as an example on how you manage your finances and interpret a bad credit score as an applicant’s inability to manage their money. Bad credit scores don’t always mean that you are bad with your finances either. Many borrowers with poor credit scores have experienced hardship at some point in time for an assortment of good reasons and many lenders understand this. Thus, it is still possible to get a small business loan or funding with a bad credit score.

What Type of Credit Score do Small Business Lenders Look At?

Before you can determine if your credit score meets the business loan requirements of which lenders, you need to find out what type of credit reporting your lender will check.  There are two types of credit scores, Business Credit Score and Personal Credit Score. Both traditional and alternative lenders will more than likely look at one or both before deciding whether to give you a business loan with a bad credit score. Let’s explore the two types of credit scoring systems:

Business Credit Score

Both individuals and businesses receive credit scores, but businesses have a different scoring scale. When considering credit scores, lenders will base their business loan requirements by the credit reporting of these three most popular reporting agencies:

  1. FICO LiquidCredit Small Business Score (SBSS)
  2. Dun & Bradstreet PAYDEX
  3. Intelliscore Plus from Experian

If you ever noticed your score varying from bureau to bureau, it is likely due to the fact that each reporting agency gathers data from different sources and apply’s different metrics and algorithms to determine your business credit score.

Other contributing factors for your business credit profile include but are not limited to, your credit history, timely payments of your bills, and available open credit. The magic number for a business loan is usually a ‘75’. Anything less would be considered a low score making it difficult to receive a loan.

Note: FICO SBSS uses a scale of 1-300 so 75 doesn’t apply if your lender uses this reporting agency.

Personal Credit Score

Even if you have a good business credit score, most lenders will view your personal credit score as the most important factor business loan requirement applied when trying to secure a small business loan.  Just like with your business credit score, a low personal credit score is also a reflection of how lenders think you manage your finances and will manage them in the future.

Personal credit scores are applied the same way as business scores but the scoring scale is different. A score less than 640 makes it unlikely that larger banking intuitions will grant you a business loan.

The SBA often requires an excellent personal credit score in order for your business to qualify for a loan. Other lenders, such as alternative lenders, tend to focus on other factors besides your credit score but usually have higher interest rates.

TIP: How to get your Personal Credit Score for Free
You are entitled to a free credit report from each of the three credit reporting agencies (Equifax, Experian, and TransUnion) once every 12 months. You can request all three reports at once, or space them out throughout the year.  >> FreeCreditReport.com

 

Factors that Effect the Credit Scores of Borrowers trying to meet Business Loan Requirements

It should be noted that many different factors contribute to your “fundability”, not just your credit score. Here are some of the many factors that may also be used calculate a business and personal credit score:

Factors Effecting Business Credit Score
How much is owed to lenders and suppliers
Legal filings and public records, such as bankruptcy and tax liens from local, county, and state courts
Credit utilization
Company size
Company age
Length of credit history
Company background information
Factors Effecting Personal Credit Score
Total number of credit accounts you have open, including mortgages, credit cards, automobile loans and other accounts
Amount you owe on each account, and the monthly payments you must make on each
Accounts that are properly paid
Delinquent accounts (for which payments are past due, may negatively impact your credit score)
Derogatory accounts (those which negatively impact your credit score)
Accounts that have been closed

What Business Loan Types are Available with a Bad Credit Score?

Once you know your business and personal credit scores, match them on the scoring charts below to find out the best types of business loans and lending institutions that can provide them:

Business Loans Available Based on Personal Credit Score

Range Category Risk Description Available Loan Types
400 – 500 Bad Credit High risk There is financing available for borrowers with this type of credit score. Many alternative lenders will not base credit scores as the most important business loan requirement. However, a high-risk score will likely bring fewer options and higher interest rates. It’s very unlikely this borrower would be able to meet the business loan requirements for a traditional bank loan or a loan from the SBA.
500 – 550 Poor Credit Higher risk If you have a credit score between 500 and 550, you’ll will have trouble qualifying for some kinds of loans. However, if the financial health of your business is good, your low credit score can be overlooked by some alternative lenders. It’s highly unlikely a borrow with this credit score will be able to get a business loan from a bank. A borrower with this credit score will pay higher interest rates.
550 – 650 Fair Credit (Average Credit) Medium risk of late payment If you have a credit score between 550 and 650, you could meet the business loan requirements to qualify for a short-term business loan. If  your business is in a good financial position you might qualify for a medium-term loan.  If your score falls within this range, you will have fewer options and higher interest rates than those with a better score. Most traditional lenders won’t offer a small business loan to borrowers in this category. The SBA considers d a 660 credit score is at the bottom threshold for consideration. If your credit score is over 620, you could qualify for a medium-term loan. Business loans for bad credit are an excellent option for you.
650-700 Good Credit Medium risk of delinquency in the next 12 months If you have a credit score over 650, you might be able to qualify for a Small Business Administration loan.  Borrowers with this level of score can expect more options and more approvals.
700+ Excellent Lowest risk borrower A borrower with this credit score will have a variety of loan types and payment options available to them. Payment terms are important in regards to business financing because you may experience uneven cash flow throughout the year. A credit score over 700 puts you in a great position to qualify with most lenders including banks,  Small Business Administration (SBA), and most all alternative lenders.

Business Credit Score Range

Unlike personal credit scores that usually range from 350 to 800,  credit reporting agencies use a sightly different scoring scale:

Dun & Bradstreet® Paydex®: 0-100

Each number indicates the average number of days the business pays its creditors. For example, a 91 means the business pays an average of 21 days early.

Range Category Risk Description Available Loan Types
0-49 Bad High risk of late payment There is financing available for borrowers with this type of credit score through alternative lenders but a high-risk score and will likely come with fewer options and higher interest rates. It’s very unlikely this borrower will meet the business loan requirements to qualify for a traditional bank loan or a loan from the SBA.
50-79 Average Medium risk of late payment If you have a credit score over 650, you might be able to qualify for a Small Business Administration loan.  Borrowers with this level of score can expect more options and more approvals.
80-100 Excellent Low risk of late payment A borrower with this credit score will have a variety of loan types and payment options available to them. Payment terms are important in regards to business financing because you may experience uneven cash flow throughout the year. A business credit score over 80 puts you in a great position to qualify with most lenders including banks,  Small Business Administration (SBA), and most all alternative lenders.

 

Experian® Intelliscore Plus℠: 0-100

Blends business, market and consumer data to build a credit score.

Range Category Risk Description Available Loan Types
1 – 10 Bad High risk of delinquency in the next 12 months It’s very unlikely this borrower would be able to qualify for a traditional bank loan or a loan from the SBA. There will be financing options available for borrowers with this type of business credit score. The business loan requirements of alternative lenders are usually not based largey on business credit scores,  but a higher interest rates can be expected if the borrower falls into the high-risk description.
11 – 25 Fair Medium risk of late payment If you have a business credit score between 11-25, you’ll will have trouble qualifying for some kinds of loans. However, if the financial health of your business is good, your low business credit score can be overlooked by some alternative lenders. It’s highly unlikely a borrow with this credit score will be able to get a business loan from a bank. A borrower with this credit score will pay higher interest rates.
26 – 75 Good Low to medium risk of delinquency in the next 12 months If you have a business credit score over 35, you might be able to meet the the business loan qualifications for a Small Business Administration loan known as the SBA 7(a).  Borrowers with this level of business credit score can expect more options and more approvals.
 76 – 100 Excellent Low risk of delinquency in the next 12 months A borrower with this business credit score will meet the business loan requirements of most lenders. They will have a variety of loan types and payment options available to them. Payment terms are important in regards to business financing because you may experience uneven cash flow throughout the year. A business credit score over 76 puts you in a great position to qualify with most lenders including banks,  Small Business Administration (SBA), and most all alternative lenders.

 

FICO® SBSS℠: 0-300

Like a personal FICO® score, the higher the score, the better.

Range Category Risk Description Available Loan Types
0 – 99 Bad High risk of delinquency in the next 12 months There is some financing available for borrowers with this type of business credit score through alternative lenders but a high-risk score and will likely come with fewer options and higher interest rates. It’s very unlikely this borrower would be able to qualify for a traditional bank loan or a loan from the SBA.
100 – 140 Fair Medium risk of late payment or no business credit history, limited time in business If you have a business credit score between 100-140, you’ll will have trouble qualifying for some kinds of loans. However, if the financial health of your business is good, your low business credit score can be overlooked by some alternative lenders. It’s highly unlikely a borrow with this credit score will be able to get a business loan from a bank. A borrower with this credit score will pay higher interest rates.
140 – 160  Good Min. required by traditional lenders If you have a business credit score over 140, you might be able to qualify for a Small Business Administration loan – SBA 7 or SBA 7(A).  Borrowers with this level of business credit score can expect more options and more approvals.
 160 – 240  Great Low-medium risk of delinquency in the next 12 months A credit score of over 160 will meet the business loan requirements to qualify for a Small Business Administration loan.  Borrowers with this level of score can expect more options and more approvals.
240 – 300 Excellent Low risk of delinquency in the next 12 months A borrower with this business credit score will have a variety of loan types and payment options available to them. Payment terms are important in regards to business financing because you may experience uneven cash flow throughout the year. A credit score over 700 puts you in a great position to meet the business loan requirements with most lenders including banks,  Small Business Administration (SBA), and most all alternative lenders.

 

Generally, you need an extremely strong credit score to meet the business loan qualifications for any bank or traditional lender business loan. However, there are many alternative lenders that provide business loans and business lines of credit to those with bad credit scores of 550 and under. A bad credit score will most likely not keep you from getting the business loan that you need. Remember, that even if your score is on par with what lenders are looking for, it does not mean you are guaranteed a business loan or that you will receiving the type of funding that your business needs. Also know that there are many alternative and traditional lenders that will compete for your business. Compare finance rates, payment flexibility, and check reviews on each lender before you commit. Commercial banks have much less flexibility with customizing business loan terms to meet your exact needs. Smaller banks may sometime offer better terms. Most alternative lenders are private investment groups and they have an extremely broad array of terms that can be adjusted for your exact requirements. Even if you have a bad credit score you still have a lot of options available. The cost of loan lead acquisition can be high to both alternative and traditional lenders, so once they know you are interested they want to close the deal as much as you need the money.

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