When it comes to SBA loans, one of the key factors that lenders consider is your credit score. Your credit score is a numerical representation of your creditworthiness and serves as an indicator of your ability to manage debt and repay loans. As an entrepreneur seeking an SBA loan, understanding the importance of your credit score is vital in positioning yourself for success.
This article aims to provide you with comprehensive insights into the minimum credit score requirements for SBA loans. We will discuss the significance of credit scores in SBA loan applications and delve into the specific credit score requirements for different SBA loan programs. Whether you have an excellent credit history or a lower credit score, understanding how credit scores impact SBA loan eligibility will empower you to make informed decisions for your business’s financing needs.
SBA lenders typically consider different credit score ranges for loan approvals. While each lender may have their own criteria, a personal credit score between 620 and 650 may still make a loan possible, depending on the lender and mitigating factors. However, scores below 650 make loan approvals very challenging. For credit scores ranging from 650 to 680, the possibility of obtaining an SBA loan increases. If your credit score is above 680, you are likely to be in a favorable position for securing an SBA loan.
Likelihood of SBA loan approval (assuming all other SBA and lender conditions are met):
|Credit score||Loan Approval|
|500s to 620||Unlikely|
|630 - 680||Possible with LoE|
|680 - 700||Very likely|
* Letter of Explanation (LoE) may be required. See LoE section below.
Explanation of credit scores and their significance in SBA lending
Credit scores play a crucial role in the lending industry, including SBA loans. They provide lenders with a snapshot of your creditworthiness and help them assess the level of risk associated with lending to you. Credit scores are generated by credit reporting agencies based on various factors, such as payment history, credit utilization, length of credit history, and types of credit.
When it comes to SBA loan eligibility, your credit score serves as an indicator of your ability to manage debt responsibly. A higher credit score typically reflects a lower risk profile, making you a more attractive borrower to lenders. On the other hand, a lower credit score may raise concerns about your creditworthiness, potentially affecting your chances of securing an SBA loan.
Owners required to have good credit
When applying for an SBA loan, one important requirement is that all 20% owners of the business must have their credit checked. This means that each owner’s credit score and credit history will be evaluated by the lender as part of the loan application process. The purpose of this requirement is to assess the overall creditworthiness of the business and the owners involved. Credit scores for owners with less than 20% ownership are not reviewed. Also, unlike the 20%+ owners, the small shareholders are not required to personally guarantee the SBA loan.
Having one owner with a high credit score and another with a low credit score in the same business can potentially impact the SBA loan approval process. Lenders typically consider the creditworthiness of all owners as they assess the risk associated with the loan. While a high credit score can demonstrate financial responsibility and increase the chances of loan approval, a low credit score may raise concerns for the lender. Generally, when there are two or more owners, one is the “money” and one is the “operator.” If the operator has a lower credit score than the money owner, that is more palatable to bankers than the opposite.
Letter of explanation
If one or more borrowers has a low credit score but plausible credit score (e.g., somewhere in the mid-600s), lenders may request a “letter of explanation” from the borrower(s). A letter of explanation related to credit scores is a document that provides additional information and context regarding certain aspects of your credit history. It is typically written by the borrower and submitted along with a loan application, such as an SBA loan application, to provide clarification and address any concerns or discrepancies that may arise from the credit report.
The purpose of a letter of explanation is to help lenders understand specific events or circumstances that may have affected your credit score or credit history. It allows you to provide a detailed explanation for late payments, liens, collections, bankruptcy, foreclosure, or any other negative information reflected in your credit report.
When writing a letter of explanation, it is important to be honest, concise, and provide supporting documentation whenever possible. Clearly state the issue or event being addressed, explain the reasons or factors that led to it, and describe any actions taken to rectify or improve the situation. The goal is to provide a reasonable and credible explanation that helps lenders understand your creditworthiness beyond the numbers on your credit report. Don’t fudge it. Banks are very good at ascertaining warts on a deal, so it’s best to be fully transparent from the beginning. Lastly, keep in mind that providing false or materially misleading information to a bank to obtain financing is a crime.
A well-crafted letter of explanation can demonstrate your willingness to take responsibility for past credit issues, show proactive measures to resolve them, and highlight positive aspects of your financial profile. It can significantly improve your chances of obtaining loan approval by providing the lender with a more complete understanding of your credit history, even if your credit score is slightly below the bank’s standard credit score minimum.
Factors that SBA lenders consider when evaluating credit scores
Lenders take into account various factors when evaluating credit scores for SBA loan applications. The most important factor is payment history. Lenders assess your history of making timely payments on credit accounts. Consistent on-time payments reflect positively on your credit score, while late payments or defaults can negatively impact it. A history of late payments and/or non-payments may have a devasting impact on a borrower’s ability to obtain SBA financing.
Lenders consider the length of time you have held credit accounts. A longer credit history provides more data for lenders to assess your creditworthiness, potentially influencing their credit score requirements. A very young borrower with a high credit score may not be deemed as attractive to a bank as an older borrower with a lower credit score but decades of credit history.
During their due diligence process, SBA lenders will review public records for bankruptcies, liens, divorces, legal proceedings, or judgments, which can significantly impact your credit score and loan eligibility. We specifically ask about these issues along with your credit score via our Lender Match tool so streamline the process of finding you excellent SBA financing options.
Impact of personal credit score vs. business credit score
For small businesses, the personal credit score of the business owner(s) often carries significant weight in the evaluation process. Lenders rely on the personal credit scores of business owners as an indicator of their financial responsibility and the likelihood of repayment for loans over $500,000.
For SBA loans under $500,000, both individual FICO credit scores and the FICO Small Business Scoring Service (SBSS) scores are evaluated by lenders. The SBSS score is particularly important for these smaller loans because the SBA requires it as part of the loan guarantee process. Without assessing the SBSS score for an SBA Express loan, the lender’s SBA guarantee could be at risk. Therefore, banks always obtain the SBSS score if the loan amount is under $500,000. SBA loans of $500,000 or less typically are done through the SBA Express Loan program. A minimum SBSS score of 160 or higher is usually necessary to meet the requirements for these loans.
Lenders assess other factors, such as the borrower’s character, experience, and the viability of the business idea when considering microloan applications. They may also provide additional guidance and support to help borrowers improve their creditworthiness and financial management skills.
It’s important to note that these credit score requirements are general guidelines and can vary among lenders. It’s advisable to consult with multiple lenders and discuss their specific credit score requirements for each SBA loan program. By doing so, borrowers can identify lenders whose requirements align with their credit profile and increase their chances of securing an SBA loan.
How collateral may impact credit score requirements
Credit scores play a crucial role in the approval process of SBA loans. However, when a borrower’s credit score is in the 600s, the availability of collateral can influence the required credit score. While SBA lenders are obligated to consider all available collateral to secure the loan, collateral itself is not a mandatory requirement to obtain an SBA loan. This is one of the reasons why SBA loans are a popular choice for business acquisitions.
In an acquisition scenario, the value of fixed assets such as real estate, equipment, and inventory is often limited. Instead, the purchase price primarily consists of goodwill. From a banker’s perspective, loan dollars allocated to goodwill are considered “airball money” since there are no tangible assets that can be sold in case of loan default. Consequently, a loan heavily reliant on goodwill will place greater emphasis on the credit score of the borrower(s) compared to a loan that is fully collateralized.
Note that even with collateral, a credit score in the 500s is unlikely to secure a loan, whereas a credit score in the 700s is generally considered sufficient for obtaining an SBA loan. While collateral can influence credit score requirements, a higher credit score demonstrates greater creditworthiness and reduces the lender’s perceived risk, making loan approval more likely.
Overview of SBA loan eligibility requirements
While credit scores are an essential component of SBA loan eligibility, it is important to note that they are not the sole determining factor. The Small Business Administration sets general eligibility guidelines for SBA loans, which include many considerations beyond credit scores. SBA loan eligibility criteria typically encompass factors such as business size, type of business, ownership structure, and the use of funds. Additionally, lenders may consider your personal and business financial statements, cash flow projections, business experience, collateral, and the overall strength of your loan application.
Building and maintaining a strong credit profile is essential for securing an SBA loan. A higher credit score indicates responsible financial management and decreases the perceived risk for lenders. It’s crucial to manage your personal and business finances prudently, make timely payments, and keep your credit utilization low to maintain a favorable credit score.
If your credit score is currently lower than desired, take proactive steps to improve your creditworthiness over time. This includes paying bills on time, reducing debt, managing credit utilization, and regularly monitoring your credit report for inaccuracies. By demonstrating financial responsibility and improving your credit score, you can enhance your chances of obtaining an SBA loan in the future.
Remember that each lender may have specific credit score requirements and criteria, so it’s crucial to research and approach lenders who are more likely to work with borrowers with your credit profile. Alternatively, utilizing our Find me a Lender option will help you cut to the chase as we will only introduce you to banks whose credit score minimums are below your particular credit score.
In conclusion, credit scores play a crucial role in SBA loan applications. Lenders use credit scores to assess the creditworthiness and repayment ability of borrowers. While different SBA loan programs have varying minimum credit score requirements, having a higher credit score generally increases the likelihood of loan approval and better loan terms.
FAQs Related to Credit Scores for SBA Loans
What role does credit score play in the SBA loan application process?
Credit score plays a significant role as it helps lenders assess the creditworthiness and financial stability of the borrower. That’s why we require borrowers tell us their credit score before we introduce them to SBA lenders via our Find me a Lender tool.
What is the minimum credit score required for an SBA loan?
The minimum credit score required for an SBA loan varies depending on the specific loan program and lender. Generally, a credit score of 650 or higher is preferred.
Can I qualify for an SBA loan if my credit score is below the minimum requirement?
While it may be challenging, it’s still possible to qualify for an SBA loan with a credit score below the minimum requirement. Other factors like strong business financials, high collateral, a large down payment, or a business partner with a excellent credit score can compensate for a lower credit score.
Can I apply for an SBA loan if I have no credit history?
Having no credit history can make it more difficult to qualify for an SBA loan. However, some lenders may consider alternative credit data or look for other indicators of creditworthiness, such as utility bill payments or rental history.
Can a business partner’s low credit score affect my SBA loan application?
Yes, if you have a business partner with a low credit score, it can impact the SBA loan application. Lenders typically assess the creditworthiness of all owners with a 20% or more stake in the business.
How can I improve my credit score before applying for an SBA loan?
Improving your credit score involves paying bills on time, reducing outstanding debts, keeping credit utilization low, and addressing any errors on your credit report.
Can I get an SBA loan with a high credit score but a limited credit history?
While a high credit score is beneficial, lenders also consider the length and diversity of your credit history. Limited credit history may require additional documentation or alternative credit data to support your loan application.
Will a bankruptcy or past credit issues disqualify me from obtaining an SBA loan?
A bankruptcy or past credit issues can impact your eligibility for an SBA loan, but it doesn’t automatically disqualify you. Lenders consider various factors and may assess the circumstances surrounding the credit issues.
Can I obtain an SBA loan if I have outstanding tax liens or judgments?
Outstanding tax liens or judgments can negatively affect your credit score and loan application. However, lenders may still consider your application if you have a repayment plan in place or can demonstrate the ability to pay off the liens or judgments.
Will my personal credit score impact my eligibility for an SBA loan if my business has a separate credit profile?
Yes, your personal credit score is typically evaluated for an SBA loan, even if your business has a separate credit profile. Lenders consider both personal and business credit history when assessing loan applications.
Remember, specific credit score requirements and lending policies can vary among lenders, so it’s essential to consult with an SBA loan advisor or lender to get accurate and up-to-date information based on your unique situation.