United States
Updated: November 29th, 2023
Thinking about getting a Small Business Administration (SBA) 7(a) business loan. Maybe you need to give your retail location a facelift. Perhaps it’s time to hire a full-time accountant for your bookkeeping now that you will have your hands full running an e-commerce and physical store. You can even apply for a loan to refinance debt. The uses for an SBA 7(a) loan run the gamut, which is one of the reasons why they’re in demand.
Indeed, the 7(a) is the most widely used SBA loans program out there. In addition to the many-use cases for the financing, the terms can be quite generous. For example, a 7(a) loan offers lengthy repayment periods and attractive interest rates capped by the government agency. The facilitation of the loan is through a lender such as a bank or a fintech company. However, the SBA backs a large percentage of it, which gives the lender more confidence to issue the loan. No wonder they’re so popular.
Here’s the thing: It’s not easy to qualify for a SBA 7(a) loan. One of the biggest reasons for this is that credit standards are high. It would be best if you were prepared for the lender to dig into your credit history, including your personal and business scores, to ensure that you meet the SBA 7(a) minimum credit score requirements.
Before you get started with your SBA 7a loan application let’s take a closer look!
Before we get into the bulk of this article, you’re probably wondering what the minimum credit score requirement is for.
While there’s no official required SBA loan minimum credit score from the Small Business Administration, lenders will often set minimum credit score requirements for both personal and business. An SBSS of 140 to 160+ or a personal score of 620 to 640+ are commonly needed to qualify.
Let’s look at the mechanics of qualifying for a loan.
First, you may have to fit the SBA’s definition of “small business.” This definition means you should run a for-profit business in the United States with fewer than 500 employees. Your business’ revenue should have fallen below the $7.5 million thresholds in each of the past three years, while net income should be under $5 million.
The standard has a maximum amount of $5 million. Even if you and the lender hash out the interest rate, the SBA has set a cap that the bank or fintech company can’t exceed.
Your credit score is one rung in the ladder of your credit profile, but it’s an important one. Miss this step and you could lock yourself outside of the benefits that the has to offer.
And contrary to popular belief, it’s not just your business credit score that matters. Your personal credit history reflects how well you handle your personal finances.
As such, it comes into play with SBA loan credit score requirements. That’s because those habits are likely to spill over into the way that you manage your business.
The go-to method for lenders is generally the FICO score, which is a model that was created by the Fair Isaac Corporation. Experian, Equifax, and Transunion, the trio of major credit rating agencies, each assigned FICO scores between 300-850. The higher you are on that scale, the better your chances of meeting the minimum credit score for a SBA loan.
The SBA itself doesn’t assign a minimum credit score to qualify for this financing. But remember, the SBA loan will come through a lender, and they have no problem doing so. For the SBA 7(a), this means a minimum credit score of approximately 640. But you’ll increase your chances to be approved for an SBA loan with a minimum credit score of 680 or higher.
You’ve also got a business credit score, which, like your personal credit score is a reflection of your business’ financial health. While the range for your personal credit score is 300-850, the scope for your business credit score is zero to 100. Three major credit agencies also determine business credit scores.
Two of these you’ll recognize from your personal credit profile. These include:
The business equivalent of your FICO score is the FICO SBSS. While it differs from your personal score in composition, a positive rating is obtainable by making timely and consistent payments to your creditors.
Dun & Bradstreet’s PAYDEX version will knock 10 points off your business credit score for being even 15 days late with a payment. With Experian, your personal credit score will come into play for your business score results. Equifax’s version factors in your business’ bank account history, ability to repay suppliers, equipment leases, and more.
For the SBA to even breathe in your direction, your SBSS score should be no less than 140. But like your personal credit score, higher is better: Aim for a score of 140 or better. Keep in mind that some lenders set their SBA 7(a) minimum credit score requirements at 160.
Even if you don’t meet the minimum credit score requirement for an SBA loan because of extenuating circumstances, don’t fret. Getting approved for your first business loan can be a slippery slope for any number of reasons. You may not have established a strong credit history, for instance. Or perhaps you were caught unaware when equipment fixes cut into your cash flow, causing you to miss some payments.
While a less-than-optimal credit score can present challenges when applying for an SBA loan, it doesn’t mean you’re out of options. There are steps you can take to improve your chances of getting approved in the future.
Start by obtaining a copy of your credit report from the major credit bureaus – Experian, Equifax, and TransUnion. Review the report carefully to identify any errors, inaccuracies, or negative items that could be affecting your credit score. If you spot any discrepancies, report them to the respective credit bureau for correction.
One of the most important factors in improving your credit score is consistently paying your bills on time. Late payments can significantly impact your credit score, so make it a priority to pay your bills by their due dates. Set up automatic payments or reminders to ensure you never miss a payment.
Another factor that lenders consider is your debt-to-income ratio, which compares your monthly debt payments to your monthly income. To improve this ratio, focus on reducing your overall debt. Consider paying off high-interest debts first or consolidating your debts into a single loan with a lower interest rate.
Build a Positive Credit History. If your credit history is limited, it’s important to start building a positive credit record. Open a secured credit card or become an authorized user on someone else’s credit card account. Make small purchases and pay them off in full each month to demonstrate responsible credit behavior.
If you’re struggling to improve your credit score on your own, consider seeking professional guidance from a credit counseling agency. These agencies can provide personalized advice and assistance in developing a plan to improve your creditworthiness.
If your credit score is still not optimal after taking the above steps, don’t lose hope. There are alternative financing options available, such as microloans, crowdfunding, or seeking investment from friends and family. Research and explore these alternatives to find the best fit for your business.
Obtaining an SBA loan can be a game-changer for your business, but it’s important to understand the credit score requirements and how they can impact your loan application. Understanding the credit score requirements from the start can make all the difference in obtaining the financing you need!
Jessica Holcomb is the Content Marketing Manager at Funding Circle, specializing in small business marketing and social media. She has a degree from the Fashion Institute of Design and Merchandising. Prior to Funding Circle, Jessica was a Marketing Manager at a successful social games company and a freelancer for many small businesses in the Bay Area. Her work can be seen in top retail, gaming, and financial small business resource sites.
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