Applying for an SBA Loan:
Minimum Credit Score Requirements
Key Takeaways
- One of the most important requirements when applying for an SBA loan is your credit score. The higher your credit score, the more credible you are in the eyes of lenders.
- Your credit score can be affected in many ways. This is usually determined using a FICO score, which is a summary of your credit report.
- This article provides all the SBA loan credit score minimum requirement for all loans—from 7(a) to microloans
- Bad credit usually translates to higher interest rates, stricter loan terms, and greater demands for collateral and personal guarantees. If you don’t need funding immediately, consider waiting until you’re able to increase your credit score.
Getting an SBA loan has become a popular choice for small businesses because it offers a variety of loan programs with low-interest rates. But, just like traditional lenders, SBA-accredited financial institutions have their own SBA loan requirements, and may even set minimum credit score requirements.
In this article, we’ll talk about the importance of your credit score when applying for an SBA loan and break down the minimum credit score requirement for a variety of SBA loan types.
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What is a Credit Score?
A credit score serves as a lender’s point of reference to determine the creditworthiness of a potential loan borrower. Credit scores fall between 300 and 850 (the higher the better) and are determined by the borrower’s credit history and the current financial standing of his or her business.
For a bank or SBA-accredited financial center to trust you (the borrower), you must be able to meet their SBA loan credit score requirements. As a good rule of thumb, you must have a credit score of 580 or higher to be eligible for the loan programs. A good credit score reflects that you pay your bills on time and that lenders can trust you will make timely payments in the future.
What Affects Your Credit Score?
Credit scores depend on a number of factors. The number of active credit accounts, total debt, repayment histories, and the length of your credit history play a role in the determination of your business or personal credit score.
The Fair Isaac Corporation (FICO) created the FICO score, which is the most used credit score for businesses in the United States. It is a three-digit number that summarizes your credit report, taking five elements into consideration to calculate your score.
FICO Score Elements
1. Payment history (35%)
This determines whether you are paying your bills on time and indicates if and when you miss any payment due dates (even by just a few days).
2. Total debts (30%)
Your total debts are the total amount of individual loans you’ve acquired in the past, such as mortgages, auto, credit card balances, bills in collections, and the like. What is being considered here is your credit utilization ratio, or the amount you have available to borrow (like the total amount of your business line of credit) vs. how much you owe.
3. Length of credit history (15%)
A longer credit history shows how experienced you are with using credit, helping lenders assess your level of risk.
FICO uses a simple formula to calculate your average length of credit history. Just divide the ages of your oldest and newest accounts by the total number of accounts you own. What is a good credit score for a business loan?
Generally speaking, the longer credit history you have, the better it will contribute to your overall credit rating. Seven years is the ideal amount of time you need to establish a good credit history.
However, this alone won’t guarantee any huge improve in your credit score. You have to consistently pay-off your bills and balances every month for lenders to assess you as a responsible borrower.
4. Mix of credit types (10%)
Creditors want to see if you are able to pay for a mix of credit types, from credit cards to installment loans to retail accounts. Lenders will use your credit history to see how well you are able to manage different types of business credit.
5. New credit (10%)
If your strategy has been to apply for several loans at once, or you’ve opened multiple credit accounts within a short period of time, you should know this affects your credit score. This is because FICO scores reflect how often you’re getting new credit.
Opening new credit lowers the average length of your total accounts, which in turn, affects your length of credit history. Also, the new credit you’ve used will only increase your “amounts owed” factor, therefore affecting your credit utilization. The higher your credit utilization, the lower your credit score.
What Credit Score is Needed for a Small Business Loan?
The credit score needed for a small business loan varies depending on the lender and the type of loan. However, a credit score of 680 or higher is generally considered good and will make you eligible for most small business loans. A credit score of 720 or higher is considered excellent and will give you access to the best interest rates and terms.
Remember: There are no fixed SBA loan credit score requirements since different types of SBA loan categories are available for you.
SBA-qualified lenders usually set their own criteria when assessing your eligibility. Most lenders will require a minimum FICO score of 620 or higher for their SBA Loans.
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Minimum SBA Loan Credit Requirements Per Loan Program
If you want a general idea of the SBA loan credit requirements score minimums per loan type, we’ve broken them down for you. Please note that the SBA has not set an exact minimum fico score for SBA loan credit score requirement so these are estimates based on what lenders commonly look for.
1. SBA 7(a) Loan Minimum Credit Score
The minimum credit score required for the SBA 7(a) business loan is 650.
The 7(a) loan is the most in demand SBA loan program to date. It guarantees small business owners up to $750,000 of working capital from their local 7(a) lender, with a partial guarantee from the Small Business Administration. The minimum credit score required for the SBA 7(a) business loan is 650.
Where to use the SBA 7(a) loan
You can use your SBA 7(a) loan for various purposes, especially when real estate is involved. Ideally, SBA 7(a) loans are intended for short- and long-term working capital, refinancing debts, and purchasing new office equipment.
Other SBA Credit Score Requirements to qualify for SBA 7(a) Loans:
- Strong business cash flow statement
- Location of business operation
- Nature of business (must be operating for profit)
- Considered a small business, as defined by the SBA
- Have reasonable invested equity
- Use alternative financial resources, including personal assets, before seeking financial assistance
- Be able to demonstrate a need for a loan
- Not be delinquent on any existing debt obligations to the U.S. government
2. SBA Express Loan Minimum Credit Score
The minimum credit score required for express loan is 600.
The SBA express loan functions similarly to an SBA 7(a) loan, but it offers up to $5 million and has a guarantee of up to 85% of the total loan amount.
With this type of loan, borrowers will be notified within 36 hours of applying as to whether or not they’ve been approved. If you are approved, you’ll be able to receive the funds within 90 days.
SBA 7(a) loans are notorious for the tedious application process and long lead times for approvals or denials. The SBA express loan aims to address that issue, however borrowers often find it much harder to get a nod from lenders when they apply for the quicker option.
The minimum credit score required for express loan is 600, but this ensures loan amounts between $30,000 and $150,000. If you currently have a credit score of 650 or higher, you will be eligible to apply for loans greater than $150,000.
Some SBA-credited lenders will prefer applicants with a business loans with 680 credit score or higher to be eligible for the maximum loan amount. It’s best to consult with the lending company you’re working with about what their specific SBA credit score requirements are.
Where to use the SBA express loan
You can use your SBA express loan for a myriad of purposes – from loan consolidation to payroll.
Other requirements to qualify for SBA express loans:
The basic requirements to qualify for an SBA express loan are the same with the 7(a) loan. Make sure your business qualifies as a small business loans 600 credit score based on the definition set by the SBA, and you’ll need to have been in operation for a minimum of two years.
3. SBA 504 Loan Minimum Credit Score for SBA Loan
The minimum credit score for an SBA loan is 680 with a 10% down payment to purchase the asset.
The SBA 504 loan, or SBA CDC loan, offers long-term, fixed-rate funding of up to $5 million for major fixed assets (i.e., real estate, equipment, etc.) that promote business growth and job creation. SBA 504 loans are not intended to be used as working capital.
Borrowers do not directly get the funds from the SBA. Instead, the government body works with Certified Development Companies (CDC), which are community-based partners that regulate non-profit organizations.
The minimum credit score for an SBA loan is 680 with a 10% down payment to purchase the asset. To purchase the asset, business loans with a 680 business credit score are accepted.
The way it works is that you’ll need to get funding from a bank or local lender to purchase your asset, followed by a second loan from a CDC-certified company. This CDC-recognized organization offers a guarantee of up to 40% of the asset’s value, which is covered by the Small Business Administration.
Personal guarantees are also required when applying for a 504 loan.
Where to use the SBA 504 loan
The SBA 504 loan is most commonly used to fund new office facilities, commercial real estate acquisitions make big machinery purchases, or buy land. Other successful small businesses used SBA 504 loans to buy or build parking lots, landscaping, and facilities that require large funding amounts to build or maintain.
Other requirements to qualify for SBA 504 loans:
- Nature of business
- Company size
- Qualified management expertise
- A feasible business plan
- Good character
- Any proof showing your ability to pay off the loan
- Must be operating for profit in the U.S.
- Must have a tangible net worth of up to $15 million
- Average net income should be less than $5 million after federal income taxes for the two years preceding the loan application
4. SBA Microloan Minimum SBA Credit Score
The SBA microloan credit score minimum credit score is 620.
The SBA microloan credit score program provides small business loans 600 credit score and qualified non-profit childcare centers with loans up to $50,000 and has a softer minimum sba credit score requirement compared with other SBA loan programs.
The SBA microloan credit score minimum credit score is only 620, but other lenders will require up to 640 depending on the other business requirements you present. Collateral is also required since this reduces the risk for lenders.
Where to use the SBA microloan
SBA microloans can be used for a variety of purposes, from paying an outsourced professional to repairing office equipment. These loans don’t exceed $50,000 so your funding needs will have to be within that limit.
Other requirements to qualify for SBA microloans:
The application requirements for an SBA microloan vary from one community lender to another. Generally speaking, they don’t require a minimum number of years in operation in order to qualify. You only need to show proof that you are a responsible borrower and that your small business has a positive cash flow forecast.
On top of that, you need to show a sustainable business idea that includes your strategy, your experience and credibility in the field, and positive personal credit.
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Can I Get an SBA Loan with Bad Credit?
Getting an SBA loan with bad credit will depend on the loan type. In general, bad credit usually translates to higher interest rates, stricter loan terms, and greater demands for collateral and personal guarantees. If you don’t need funding immediately, consider waiting until you’re able to increase your business credit score so you can qualify for a loan with more favorable terms. If time is of the essence, you’ll have to find other areas of your business that can prove your trustworthiness to the lender. It is possible, you’ll just have to get more creative.
Some lenders won’t consider borrowers with bad credit scores so you’ll need to find one who is willing to check your other credentials. Things like your total years in business, your cash flow statement, or any other proof as to why you can be trusted.
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Conclusion
If you’re set on getting an SBA loan for your business, the application process may take anywhere from 14 days to six months, depending on the documents you present. Be sure to know what the SBA loan requirements are and coordinate your needs with the lender you chose to work with so you know the best small business loan program best addresses your goals.
Ready to apply for an SBA Loan?
