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When you apply for a business loan, creditors will assess a few key factors to determine if you’re eligible for funding. Your credit score is one of these factors — it helps the lender determine the likelihood of you defaulting on the loan and set your interest rate.
There’s no industry-wide credit score requirement for business loans. Still, a higher credit score generally means you’ll be eligible for funding with more attractive terms. A lower credit score could make it more challenging to qualify for a business loan, and you’ll likely receive less favorable interest rates and loan terms if approved.
Why lenders care about your credit score for business loans
The best terms on small business loans are generally reserved for borrowers with solid credit scores. Your FICO score, the most prevalent amongst lenders, indicates how likely you are to make timely payments on a loan. It ranges from 300 to 850.
A higher credit score reassures the lender that you don’t pose a significant credit risk. But if your score is lower, you’ve likely had credit missteps in the past, so the chance of defaulting on a new loan is greater. The lender may charge you more to borrow money to offset that risk.
Below are the FICO score ranges, though individual lenders may define them differently.
- Exceptional: 800-850
- Very good: 740-799
- Good: 670-739
- Fair: 580-669
- Poor: 300-579
Minimum credit score by lender type
Each lender has its own minimum credit score requirements. However, here are some general guidelines to keep in mind as you explore lenders offering funding opportunities:
- Banks and credit unions: A credit score of 700 or higher is ideal for a bank or credit union business loan. If you can reach a score of 740 or higher, you’ll likely get approved for the best terms the lender offers.
- SBA lenders: Aim for a credit score in the mid-600s to qualify for an SBA term loan.
- Online lenders: You won’t need perfect credit to qualify for a business loan from an alternative lender. Some accept scores in the mid-500s, especially if your business shows other signs of financial health. But expect steep borrowing costs if you have poor or fair credit.
Minimum credit score by business loan type
Once you’re familiar with the minimum credit scores lenders expect, dig a bit deeper to learn what’s acceptable by business loan type. Below is a list of what most lenders require:
- Business term loan or line of credit: These loans are accessible through alternative lenders with a credit score as low as 580. If you plan to apply with a bank or credit union, a 670 or higher is ideal.
- Commercial real estate loans: You’ll need a strong credit score — preferably 680 or higher — to secure a commercial real estate loan.
- Equipment loan: Since equipment loans are secured by the equipment you purchase, you could get approved with a minimum credit score of 600.
- Merchant cash advance: This type of loan caters to credit-challenged borrowers and is often accessible with a credit score in the mid-500s.
- SBA loan: Lenders offering SBA loans require credit scores between 620 and 680.
How to raise your credit score
If your credit score isn’t up to par, consider improving it before applying for a loan. A high credit rating could open the door to better funding opportunities with more competitive terms and lower borrowing costs.
Before you get started, it’s vital to understand how your FICO score is calculated:
- Payment history: 35 percent
- Amounts owed: 30 percent
- Length of credit history: 15 percent
- Credit mix: 10 percent
- New credit: 10 percent
Based on the credit-scoring equation, here are some tips to help boost your credit score:
- Dispute credit report errors (if needed).
- Pay your bills on time.
- Get current on any past-due accounts.
- Pay down your outstanding balances — preferably to 30 percent utilization or lower — to lower your credit utilization ratio.
- Don’t close old credit accounts.
- Only apply for new credit as needed.
- Regularly monitor your credit reports.
Business credit scores
Some lenders will also examine your business credit score when you apply for a business loan. Score ranges vary by credit reporting agency. You’ll see a 0 to 300 if the score is obtained from the FICO Small Business Scoring Service — an important score to know if you’re pursuing an SBA loan.
Business credit scores are derived from your company’s payment history. Some business credit scoring models also consider your company’s age, size, payment history, debt usage and industry in which it operates.
The three primary business credit reporting agencies are Dun & Bradstreet, Equifax and Experian. You can retrieve the scores for your company by visiting their websites.
Building business credit can be a great way to qualify for larger loans and distance your own finances from your business’s.
The bottom line
There’s no magic credit score that guarantees your approval for a small business loan. That said, a higher credit score can boost your approval odds if you meet the lender’s other guidelines.
Before you apply, reach out to the lenders you’re considering to learn more about their lending criteria and minimum credit requirements. Knowing their requirements will help you decide whether it’s worth your time to apply. Also, ask if they evaluate business credit scores.
FAQs about minimum credit scores for business loans
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You may still qualify for a loan if you cannot meet the lender’s minimum credit score requirement. The lender may consider other compensating factors to approve your application. For example, if your company’s been in business for several years and operated profitably, you may be eligible for funding with a low credit score.
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Yes, getting a business loan with a 600 credit score is possible. Traditional bank loans and SBA loans aren’t ideal with this credit score. Still, you could be eligible for other forms of funding, like a business term loan or line of credit, through an online lender.
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Getting a business loan with a 500 credit score can be challenging, but you’re not completely out of luck. Consider an alternative lender with lenient guidelines to assist with your funding needs. A merchant cash advance or invoice financing could also be ideal with a lower credit score.
