Key takeaways
- Up to 85 percent of SBA loans are backed by the federal government.
- Banks use both personal credit scores and SBSS scores to determine creditworthiness.
- You have the best chance of approval for an SBA loan with a credit score of 600 or above.
Business loans that are backed by the U.S. Small Business Administration (SBA) are referred to as SBA loans. The money for these loans comes from a bank, but the government promises to cover up to 85% of the bank’s loss if you stop making SBA loan payments. This allows the lender to assume less risk. Still, you must have a qualifying credit score to get approved.
The SBA itself doesn’t set personal credit score standards for loan approval. Instead, the institution that actually lends the money will determine its own creditworthiness standards. For this reason, the credit score required to obtain an SBA loan can vary from bank to bank and will also depend on the type of loan you want. The SBA does have a minimum standard for the Small Business Scoring Service (SBSS) score.
Luckily, if you get denied for an SBA loan, you have a few options. You can apply for an SBA loan with another lender, improve your credit score and apply again, or try an alternative loan to get the funds you need.
What is an SBA loan?
An SBA loan is a type of loan in which some of the money is guaranteed to the lender by the government. This helps the lender recover a portion of their lost funds if you default on the loan. You can use an SBA loan for franchise businesses, startups, and any company that meets SBA criteria and size standards.
Many businesses choose an SBA loan program because they have competitive rates and make loan counseling available to borrowers. They can be a good way to fund your business if you don’t have enough time in business or a high enough credit score to qualify for a conventional loan.
There are four primary requirements for SBA loan approval:
- You must be a for-profit business
- You must do business in the United States
- You must be creditworthy
- You must have exhausted other loan options
SBA credit score requirements
There is no standard personal credit score threshold for SBA loan approval. However experts agree that there are some common score requirements that business owners should keep in mind.
SBA 7(a) loans: This is the SBA’s primary loan program. You can use this type of SBA loan for real estate, consolidating other debt, installing machinery, and more. The minimum personal credit score required is usually between 630 and 680. The bank may be willing to accept a lower credit score if your business has other strengths, such as a high SBSS score or a strong annual revenue.
SBA 504 loans: This type of SBA loan must be used to promote business growth and job creation. It can be used on real estate or modernizing equipment, but may not be used as working capital or to consolidate other debt. The credit score required for this type of loan tends to be a bit higher; you may need a score of at least 680.
SBA Express loans: An Express loan is a part of the 7(a) loan program, but you can get the money within weeks instead of the typical two to three month waiting period. These are working capital loans up to $500,000. The typical range of acceptable credit scores is about 640 to 670. You may be able to borrow under $150,000 with a lower score.
SBA Microloans: These loans are smaller than most business loans, offering a maximum amount of $50,000. You can use these funds for almost anything that helps you grow your business. Common uses include inventory, supplies, working capital, and equipment. Because these loans are smaller, you may get approved with a score above 500 if you have ample revenue. Your chances of approval could be improved with a score of at least 620.
In addition to your personal credit score, your lender will likely consider your SBSS score. The SBA requires borrowers to have a minimum score of 155 out of a possible 300. This score is calculated using criteria including your personal credit score, personal payment history, company’s time in business, business debt, and business payment history.
What to do if your credit doesn’t meet requirements
If you don’t yet meet credit standards, you may be able to improve your score in just a few months with the right strategy.
Pay off existing debt
Your debt-to-credit ratio is a big part of your credit score. If you can bring down your existing debt, you may see a spike in your credit score quickly. Aim to keep your debt utilization below 30 percent, especially on revolving credit like credit cards.
Establish more business credit
New businesses may not have a lot of business credit, which can hurt your SBSS score. By establishing a business credit card or small loan and paying it off, you may build a better credit reputation and become more appealing to SBA lending partners.
Make all payments on time
Payment history is also a significant influence on your personal credit score and business SBSS score. It’s better to make all minimum credit payments on time than to be overly aggressive in your initial payments and then fall short in future months.
SBA loan alternatives
If you aren’t approved for an SBA loan but still need money to grow your business, consider the following avenues.
Online loans
Online lenders are a type of alternative lending. That is, this source of funding falls outside of traditional banks and credit unions. While online lenders don’t tend to have competitive rates, they may have more lenient credit requirements and approve money in just hours.
Business credit cards
You can also use business credit cards to pay for a variety of purchases and build business credit. You may also earn points that can be used for future purchase or toward business travel.
Government grants
Small businesses may also qualify for business grants. This is money that you don’t have to pay back. Go to grants.com or investigate local grant opportunities to see you your business
The bottom Line
The lender who provides your loan controls their own credit score requirements, even if they are an SBA partner. You may increase your chances of loan approval if you have a personal credit score of at least 640 and SBSS score of 155 for most loan types. If your score isn’t where it needs to be, you can point it in the right direction by lowering your debt-to-credit ratio and paying on time.
Frequently asked questions (FAQs)
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Your personal credit score and SBSS are two of the factors that are used to determine if you’re approved for an SBA loan. Lenders will also consider things like your time in business, annual revenue, and if you meet the basic SBA loan requirements.
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You must meet four basic criteria to be considered for an SBA loan. Businesses must be for profit, operating in the U.S., credit worthy, and have exhausted other financing options. If you don’t meet these standards, your business must come into compliance before you can apply.
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Microloans are the smallest SBA loans, funding requests up to $50,000. Because the loan amounts are low, you may be more likely to get approved for a microloan than a 7(a) loan or 504 loan.
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The down payment required for SBA loans may vary by lender, but will often be around 10 percent.
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