The pandemic has encouraged many people to chase their dreams of entrepreneurship. The ability to take control of their job security and create the flexibility they need is appealing. Fortunately, we live in a digital world with many business opportunities to run online and operate from home.
Securing a business loan to get started is often a challenge. One of the biggest impacts on securing a business loan is your credit score. Here’s what you need to know about how good your credit must be to get a business loan.
A credit score is a quantification of your credit history. This number summarizes both the positive and negative actions you’ve taken when paying bills and borrowing money, presented on a range of 300-900.
The ranking of your credit score and how it’s perceived is as follows:
- 300 – 579 – Poor
- 580 – 669 – Fair
- 670 – 739 – Good
- 740 – 799 – Very Good
- 800 – 900 – Excellent
While the numbers may vary slightly based on the credit bureau’s scaling system, they’re close to this range. When building your credit score, aim for a minimum of 670, but the higher your score, the better.
There are many variables that impact your credit score, both positively and negatively. Things like having open loan accounts and making payments on time are positive factors.
Conversely, late or missing payments, lenders running credit checks, collections, and bankruptcy all play a negative role in your credit score. These negative items carry various weights and have different statutes of limitations depending on your state and the occurrence.
Another factor that impacts your score is your debt ratio. If you currently have a $10,000 line of credit, but you only owe $2000, your credit score will be higher than if you owed $4000. Perhaps the fastest way to raise your credit is to leave your accounts open and unused as you pay down existing debts.
There’s no standard credit score requirement for securing a business loan. Different lenders and banks will have different thresholds for approval. Most traditional banks will require a minimum of 670, or a “good” credit score. However, there are often options available for those who have a less than perfect credit history.
While you may be able to find a business loan with fair or poor credit, you’ll likely have to use collateral or a down payment to secure your loan. Additionally, you can expect to have higher interest rates than someone with good credit.
Even a poor or fair credit score is better than having no credit history. If you’re someone who doesn’t have much experience with credit, consider getting a low-limit credit card to use for bill payments, groceries, etc.
The best thing you can do to improve your credit score is to practice healthy financial habits. Pay your bills on time and always make your minimum payments. It’s also beneficial to put a strategy in place to pay down your debts.
Set aside time to go over your credit report and see what’s impacting your score. This exercise may provide an opportunity to dispute negative items and have them removed.
If you have bad credit, time and focus will be your best bet at getting a business loan. However, if you’re moving forward as is, remember to be patient. Look into bootstrapping and crowdsourcing opportunities rather than taking a high-risk loan. Making notable improvements will also showcase fiscal responsibilities as you apply to various lenders.
You don’t require excellent credit to secure a business loan. However, a good credit score will open up more opportunities and give you better interest rates to finance your business.