Banks used to approve only about 9% of all business loan applications. In 2018, that figure rose up to 26%. Why does that leave 75% of small businesses struggling to get a loan?
It comes down to your credit score.
Business loans aren’t easy to get, especially if your credit score is average or below average.
Keep reading to find out what your credit score should look like before you apply for a business loan, and to learn some tips to get your score there.
Why Is Your Credit Score Important?
Whether you’re getting an SBA loan, a retail loan, or some other type of business loan, banks want to be assured that you can pay the loan back.
Many loans are unsecured loans, meaning that there is no guarantee that the loan won’t be paid back. The SBA and banks are taking on a lot of risk to lend the money to your business. They want to limit that risk as much as possible.
They’ll look at your business financials and credit history to try to predict the likelihood you’ll pay the loan back. If you have a history of late payments, lenders think that you’re likely to continue that pattern and will deny your loan.
The Average Credit Score for Business Loans
The average credit score depends on what credit is used for the loan. Your business may have established credit. Your personal credit is also used to determine the risk to the banks.
When your personal credit is used, 700 is considered to be a magic number. It means that you have good, but not perfect credit.
The SBA’s minimum credit score is 640. That doesn’t mean you’ll automatically get approved. Ideally, you want your score to be excellent which is between 750-800. An excellent score will give you the best rates.
Business credit is scored between 0-100, with 100 being excellent.
How to Get a Business Loan With Average and Bad Credit
For people who have bad credit or average credit, it can be difficult to get approved for a small business loan. If you do get approved, the terms won’t be as favorable, and it could cost you more money in the long run.
You have a couple of options. The first is to accept the loan terms given your credit score. You’ll pay much more in interest and fees. That’s money you’re giving to the banks instead of investing in your business.
The other option is to raise your score. You can do that by paying down your existing debt, which will raise your credit utilization rate. Paying your bills on time over a long period will also raise your score.
Get a Business Loan
A business loan can give small businesses an influx of much-needed cash. Those funds can be used for growing the business or purchasing equipment.
The best chance to get approved for a loan depends on your credit score and ability to pay the loan back. Find out more about the business loans available and apply today.