Small Business Administration (SBA) loans

How Do I get an SBA 7(a) Loan With Bad Credit?

Updated: August 4th, 2020

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Bad credit happens, but it doesn’t have to be a life sentence as long as you’re willing to work on it. As a business owner with less than perfect credit, you may wonder: Can I get an SBA loan with bad credit? It may feel like it’s your destiny to be stuck on the sidelines, waiting for your chance to access financing through the SBA’s 7(a) loan program. With this loan, you could refinance your debt, replenish inventory, or expand your business at a competitive interest rate that’s capped by the SBA and a term that can extend to a decade in many situations. Understandably, you don’t want bad credit to get in the way.  

The 7(a) is a guaranty program in which the SBA backs a large percentage of the loan. By doing this, the lender is protected in the unfortunate event of a default. But, that doesn’t mean lenders aren’t taking on any risk. 

The reality is that only some lenders will work with business owners whose credit has been damaged. You’ll find it’s a lot easier to get an SBA 7(a) loan with strong credit — and your list of lender options will be longer. So while it’s not impossible to get SBA loans with bad credit, your energy might be better spent improving your personal and business credit scores to qualify for the financing lock stock and barrel. 

How bad credit dynamics affect SBA loan qualifications

When it comes to securing an SBA 7(a) loan, both your personal and business credit score will come into play. On the personal side, this means your FICO score. This number falls within a range of 300-850 and is assigned by the three major credit bureaus — Experian, Equifax, and Transunion. 

Minimum credit limits

The Small Business Administration doesn’t identify a specific FICO score that you should obtain to qualify for one of its popular 7(a) loans. Instead, it leaves this honor to the lenders, which actually issue the loans, to set. Generally speaking, for the lenders to look your way, you’ll want to have a minimum credit score of 640. Having said that, you’ll increase your chances of getting approved for a 7(a) loan from the likes of alternative lender Funding Circle with a FICO score of 680 or higher. 

Getting an SBA loan with a bad business credit score 

Your business credit score is separate from your FICO score. But, both numbers come into play when considering how to get an SBA loan with bad credit. Your business credit score falls in a range of zero-100 or 0-300, depending on the model. The higher the score, the better, as it means you’re more likely to make your loan payments on time. Your business score is a reflection of your creditworthiness. As such, a lender is expected to be hesitant to give out SBA loans if you have bad credit. 

A business credit score examines factors such as: 

  • Payment history  
  • Credit history 
  • Debt and your debt utilization rate   
  • The risk associated with your industry 
  • Size of your company (number of employees, annual sales, financial statement) 

The first step in understanding if you can get an SBA loan with bad credit is familiarizing yourself with your business credit score, which you can do by checking in with the credit bureaus that maintain it — Dun & Bradstreet, Experian, and Equifax. Lenders also consider your FICO Small Business Scoring Service (SBSS) score, which uses a hybrid model and reflects your personal and business financial health. 

The effects of bad credit on SBA loan terms

Your score influences your approval rate for a business loan. But getting an SBA loan with bad credit could also affect the terms, such as maturity date and interest rate. Your business credit score is attached to an Employer Identification Number (EIN), which is akin to a social security number, only it’s for your business. You can apply for an EIN with the IRS.  

When it comes time for you to try for the 7(a) loan, remember that you will be applying with a lender, not the SBA itself. Considering the SBA backs up to 85% of the loan, they have standards, too. They are primarily looking for good character, a proven ability to manage your credit, and the ability to repay the loan.  

Can I get an SBA loan with bad credit?

As mentioned, it’s up to the lender to approve you for an SBA 7(a) loan. If you’re applying for an SBA loan with bad credit, your chances of getting approved can still be relatively good if you’ve been in business for several years. If you’re a startup whose credit score is low because of a lack of a track record, you might need to wait until you’ve established a payment history or your credit score improves. 

Also, there may be extenuating circumstances that caused your credit score to lower, representing a one-time event or business crisis. In this case, it’s not because you were habitually late on your payments. In a situation like this, the answer to “Can I get an SBA loan with bad credit?” isn’t so straightforward, and the lender might be more willing to bend. 

Based on anecdotal evidence, the consensus is that getting an SBA loan with bad credit is contingent on the lender. Whether it’s a bank, credit union, or alternative lender, some companies are more conservative than others. Your best bet in getting an SBA loan with bad credit might be finding a lender that checks all of your boxes and adjust your expectations to fit their standards. Once you have the loan, you’ll be in that relationship for a while, so it’s best not to settle.

How to get an SBA Loan with bad credit by bolstering your profile  

In the interim, rather than waiting around, you can take steps to make it easier for you to get approved. One of the surefire ways to boost your business credit score is to get approved for an SBA 7(a) loan. That’s because it will establish a payment history that lenders like to see.  Other suggestions include: 

  • Establish lines of credit with your suppliers and make timely payments over time. 
  • Take out a business credit card, even if the credit limit is low at first due to a lack of credit history or bad credit. Use it exclusively for business transactions. 
  • Keep a budget for your business, similar to the way you do for your personal expenses. Track your revenue, expenses, and savings. This documentation will go a long way when it comes time to apply for an SBA 7(a) loan. 
  • Maintain a debt-to-income ratio — which is your monthly expenses divided by gross income — of below 43%.  This ratio illustrates your ability to repay debts. 

And while you may not be able to fix your credit overnight, the sooner you get started, the sooner you’ll be on your way to accessing an SBA 7(a) loan. When it comes to getting a positive response to the question: “Can I get an SBA loan with bad credit?”, Mick Jagger said it best when he sang, “You Can’t Always Get What You Want.” If you work on your credit and pay your bills on time, chances are you’ll find that eventually, you get what you need. 

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