Small Business Loan Credit Score: Everything You Need to Know

Small businesses are the backbone of our economy, but they often struggle to secure the financing they need to grow and thrive. One of the biggest hurdles for small business owners is their credit score. Your credit score can have a big impact on your ability to get a small business loan, but many entrepreneurs don’t fully understand how credit scores work or what they can do to improve them. In this article, we’ll take a deep dive into small business loan credit scores, including what they are, how they work, and what steps you can take to improve your score and increase your chances of getting the financing you need.

What is a Small Business Loan Credit Score?

Your credit score is a number that represents your creditworthiness based on your past credit history. A small business loan credit score is a credit score that is used by lenders to determine your eligibility for a small business loan. Your credit score is calculated based on several factors, including your payment history, the amount of debt you have, the length of your credit history, and the types of credit you have. Your score can range from 300 to 850, with higher scores indicating better creditworthiness.

How is Your Small Business Loan Credit Score Calculated?

Your small business loan credit score is calculated using a variety of factors, including:

Factor
Weight
Payment history
35%
Amount owed
30%
Length of credit history
15%
New credit
10%
Credit mix
10%

Your payment history is the biggest factor in your credit score, accounting for 35% of your overall score. This includes things like whether you’ve paid your bills on time, how many late payments you’ve had, and how long it’s been since you’ve missed a payment. The amount you owe makes up 30% of your score, and includes things like your credit card balances, your loan balances, and how much credit you’re using compared to your total available credit. The length of your credit history makes up 15% of your score, and includes things like how long you’ve had your credit accounts and how long it’s been since you’ve used them. New credit and credit mix make up the remaining 25% of your score, and include things like how many new credit accounts you’ve opened recently and the different types of credit you have (e.g. credit cards, loans, etc.).

Why is Your Small Business Loan Credit Score Important?

Your small business loan credit score is important because it’s one of the primary factors that lenders consider when deciding whether to approve you for a loan. Lenders want to see that you have a history of responsible borrowing and that you’re likely to repay the loan in full and on time. If you have a low credit score, lenders may be hesitant to give you a loan or may charge you higher interest rates and fees to offset the risk of lending to you.

What is a Good Small Business Loan Credit Score?

A good small business loan credit score is generally considered to be 680 or higher. However, the exact definition of a “good” credit score can vary depending on the lender and the type of loan you’re applying for. Some lenders may require a higher score for certain types of loans or may be more lenient with their credit requirements for other types of loans. In general, though, the higher your credit score, the more likely you are to be approved for a loan and to receive favorable terms.

How to Improve Your Small Business Loan Credit Score

If your small business loan credit score is low, there are several steps you can take to improve it:

1. Check Your Credit Report

One of the first steps in improving your credit score is to check your credit report for errors or inaccuracies. You’re entitled to a free copy of your credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) once a year, so take advantage of this and review your report carefully. If you find any errors or inaccuracies, dispute them with the credit bureau to have them corrected.

2. Pay Your Bills on Time

Your payment history is the biggest factor in your credit score, so it’s important to make sure you’re paying your bills on time. Set up automatic payments or reminders to help you stay on track and avoid late payments.

3. Reduce Your Debt

The amount you owe makes up 30% of your credit score, so reducing your debt can have a big impact on your score. Try to pay down your balances and avoid taking on new debt until you’ve made progress on paying off your existing debt.

4. Build Your Credit History

The length of your credit history makes up 15% of your score, so it’s important to have a long and positive credit history. If you’re just starting out with credit, consider getting a secured credit card or becoming an authorized user on someone else’s credit card to help you build your credit history.

5. Use Credit Responsibly

Using credit responsibly and maintaining a good credit mix can also help improve your credit score. Make sure you’re not maxing out your credit cards, and try to have a mix of different types of credit (e.g. credit cards, loans, etc.) to show that you can handle different types of borrowing.

FAQs

1. What is the minimum credit score for a small business loan?

The minimum credit score for a small business loan can vary depending on the lender and the type of loan you’re applying for. However, in general, you’ll need a credit score of at least 580 to be considered for most small business loans.

2. Can you get a small business loan with bad credit?

It can be more difficult to get a small business loan with bad credit, but it’s not impossible. You may need to explore alternative financing options, such as crowdfunding or grants, or work on improving your credit score before applying for a loan.

3. How often should you check your credit score?

You should check your credit score at least once a year to make sure there are no errors or inaccuracies on your credit report. You may also want to check your score more frequently if you’re actively working to improve it or if you’re planning to apply for a loan in the near future.

4. Can you pay to have your credit score improved?

No, you cannot pay to have your credit score improved. Your score is based on your past credit history and cannot be artificially inflated or improved by paying for services or products.

5. Does applying for a small business loan affect your credit score?

Yes, applying for a small business loan can affect your credit score. When you apply for a loan, the lender will typically do a hard inquiry on your credit report, which can lower your score by a few points. However, if you’re shopping around for the best loan terms and rate, multiple inquiries within a short period of time (usually 30 days) will be treated as a single inquiry and will have less of an impact on your score.

6. How long does it take to improve your credit score?

Improving your credit score can take time, but there are things you can do to see progress relatively quickly. Paying your bills on time and reducing your debt can have a positive impact on your score within a few months. Building a long and positive credit history can take several years, but it’s important to start as soon as possible.

7. How can I find out what my credit score is?

You can find out what your credit score is by checking your credit report from one of the three major credit bureaus (Equifax, Experian, and TransUnion). You can also use a credit monitoring service or check your score for free through some credit card companies or financial institutions.

Conclusion

Your small business loan credit score is a critical factor in your ability to secure financing for your business. By understanding how credit scores work and taking steps to improve your score, you can increase your chances of getting the funding you need to grow and thrive. Check your credit report regularly, pay your bills on time, reduce your debt, and use credit responsibly to improve your score over time. With a strong credit score, you’ll be in a better position to achieve your business goals and succeed in today’s competitive market.

Ready to take your business to the next level?

Whether you’re looking to expand your operations or invest in new equipment, a small business loan can provide the funding you need to grow your business. Don’t let a low credit score hold you back – take steps to improve your credit and increase your chances of getting the financing you need. With the right strategy and a little bit of patience, you can achieve your business goals and build a successful future for yourself and your business.

Closing/Disclaimer

The information provided in this article is for educational purposes only and should not be construed as financial or legal advice. Small business owners should always consult with a qualified financial or legal professional before making any decisions about their finances or business operations. The author and publisher of this article make no representations or warranties with respect to the accuracy or completeness of the contents of this article and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. The reader of this article assumes all risks and responsibilities in connection with the use of the information contained herein.