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Updated: Jun 5, 2020
So you’re thinking about getting an SBA 7(a) loan. Maybe you need to give your retail location a facelift now that the social distancing requirements are seemingly here to stay. 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 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 an 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) credit score requirements.
Before getting into the credit score, let’s take a look at the mechanics of qualifying for an SBA 7(a) loan. 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 SBA 7(a) loan 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 SBA 7(a) loan has to offer. And contrary to popular belief, it’s not just your business credit score that matters.
Your personal credit score is a reflection of 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 an SBA loan.
The SBA itself doesn’t assign a specific 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 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, similar to 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 the business credit score. 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 similar to 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) credit score requirements at a minimum of 160.
Even if you don’t meet the minimum credit score for an SBA loan because of extenuating circumstances – which are increasingly common in the COVID-19 era – don’t fret. Just be prepared to offer a detailed explanation to the lender.
Getting approved for your first business loan can be a slippery slope for any number of reasons. You may not have established a payment history, for instance. Or, perhaps you were caught unaware when equipment fixes cut into your cash flow, causing you to miss some payments.
Some advice for business owners is to stay on top of your credit scores so that you know where you stand. And if you get caught with unexpected expenses, keep paying your bills when they’re due even if it’s below the minimum amount.
Keep your personal and business accounts separate, so any personal credit blemishes don’t spill over into your business score. Keep expenses low and strive to operate at a profit. These steps could go a long way with lenders and toward meeting SBA loan requirements in terms of credit score.