Applying for a Business Loan? See Credit Score and More

It’s true: That big, frightening, three-digit number at the top of your credit report plays a crucial role when applying for a business loan. A strong credit score can open doors to more and better funding for your small business, while a weak score may limit your options severely.

Your credit score is not the only factor lenders consider when evaluating your business, however. Their impression of you as a borrower depends on a few other key ingredients, as well.

WHY YOUR CREDIT SCORE IS SO IMPORTANT TO LENDERS

Your credit score provides an at-a-glance evaluation of your business’s trustworthiness. It quantifies your reliability and tells lenders what to expect from you as a borrower. It pulls information from banks, credit unions, retailers, credit card companies—any lending institution that reports to the three main credit bureaus, Equifax, TransUnion and Experian.

Remember that your credit score isn’t just a tally of how regularly you pay your bills. Many aspects of your borrowing activity affect your score, including how long you’ve been borrowing, the size of your current debts, and your experience with different kinds of credit—all things lenders want to know before trusting you with a loan. (For more on what goes into a credit score, see FICO’s helpful breakdown and learn how the different components are weighted.)

FICO evaluates credit scores, as reported by those three primary credit bureaus, as follows:

• 720+: Excellent
• 719 to 690: Good
• 689 to 630: Fair
• 629 to 300: Poor

Each lender sets its own qualifications regarding minimum credit scores. Many banks demand only “good” or “excellent” scores when issuing large, long-term loans (if they accept loan applications from small business owners at all), but other lenders, particularly alternative lenders offering short-term loan products, will accept credit scores in the “fair” or even “poor” range.

While your credit score plays a crucial role in the strength of your loan application, it’s not the only factor lenders consider, and a less-than-stellar credit score won’t necessarily disqualify you from funding.

WHAT LENDERS CONSIDER, OTHER THAN YOUR CREDIT SCORE

Credit is just one the “5 C’s” lenders look at when evaluating your loan application. Other characteristics include your capacity, capital, collateral, and conditions.

CAPACITY

In addition to credit, lenders also look at your cash flow (your “capacity”) when reviewing your loan application. They want to see you’ll have the funds to repay the loan product you’ve selected, along with interest and fees, according to the payment schedule laid out by the lender. But because businesses can’t always provide a “yes” or “no” answer on capacity—whether because your cash flow has been inconsistent, or your business is too young to have a representative record of your cash flow—lenders consider other factors as well.

CAPITAL

Lenders also look at your personal monetary investment in your business (your “capital”) as an indicator of your commitment to its success. In your lender’s eyes, a borrower with more “skin in the game” is less likely to default and more dedicated to paying off their debts in a responsible, timely manner. Lenders are looking for a financial investment, primarily, but some may also consider less quantifiable “investments,” like your personal commitment to a family business.

COLLATERAL

Lenders may also consider the collateral you bring to the table. The value of that collateral—whether a piece of real estate, equipment, inventory, or your accounts receivable—indicates how much risk you pose to your lender, and what they can seize from you if you fail to pay back your loan.

CONDITIONS

Lenders also want to know how you plan to use their money. They want a borrower with a detailed business plan for using their loan to grow their business, as well as paying it back on time. Lenders will also look at the broader context surrounding your industry to ensure no external risks (a bad harvest, a fading trend, a market bubble on the verge of popping) threaten your ability to repay. These two factors together are the fifth “C,” your “conditions.”

All of these considerations factor into the strength of your loan application. Ensure these other areas of your application get the attention they deserve. Check that your credit report is accurate, and dispute any mistakes if necessary. The more trustworthy and qualified you appear to your lender, the more likely you’ll be to land the funding your business needs.