Business Line of Credit: How It Works

Business Line of Credit: How It Works


Small business owners rely on business lines of credit for short-term money needs. A business line of credit is similar to a credit card in the sense that you are approved for a maximum credit limit. You can borrow and withdraw funds as you need them, up to the limit.

You are charged interest only on the amount you withdraw. As you repay the amounts you borrowed, you free up the line to again withdraw those amounts.

A business line of credit is a popular type of funding. According to the 2020 Small Business Credit Survey (Federal Reserve Banks), 40% of small businesses applying for financing seek out business lines of credit.



What is a Business Line of Credit?

A business line of credit is a type of small business financing that you can draw on periodically, up to an approved credit limit.

Its number one advantage is flexibility. You borrow only the funds you need when you need them — you are not forced to take out the full amount in a lump sum. And you pay interest on the money you draw out, only, not on the full amount. So it is cost-effective.

A business line of credit is a valuable strategy for managing cash flow. That’s because sometimes expenses hit when your business checking account is low. For example, you may need money to make payroll because sales were unexpectedly down or you had a business emergency. In that case, you can tap into the line of credit.

Or perhaps you want to buy inventory and take advantage of a bulk discount. But sales are slow right now. A temporary cash flow dip doesn’t cause you to miss out on a savings opportunity.

How Does a Line of Credit Work?

A small business line of credit works like a credit card in some ways — yet it is different.

When you establish a line of credit, it means your business gets approved up to certain credit limits. The lender determines the amount based on your ability to repay, the business revenue, your credit score and other factors.

Think of it as a contingency fund. The money is there if and when you need it.

A line of credit is revolving credit. With a revolving line, as you repay the amounts you borrow, the funds then become available to borrow again.

The following business line of credit example further illustrates how a line of credit works.

  • In January, the lender approves a business line in the amount of $50,000 for your business.
  • In April, you experience a temporary cash shortfall. So you borrow $10,000 on the credit line.
  • You are charged interest on the $10,000 you borrowed, only.
  • You must pay interest and principal on repayment terms established by the lender, until the amounts you borrowed are repaid.
  • Once any funds are repaid, those amounts become available to borrow for other financing needs.
  • If you need more money later, you can go back and borrow more up to the maximum limit available.

What Can You Use a Line of Credit For?

You can use business lines of credit for any legitimate business needs or expenses.

Many FDIC banks today require business borrowers to certify that they are not involved in illegal or high risk activities, such as online gambling or payday lending. Aside from such activities, there are typically no restrictions on how small business owners use lines of credit. Companies use business lines of credit for:

  • operating expenses,
  • equipment funding,
  • inventory financing,
  • software installations,
  • buying new computers or mobile devices,
  • paying unexpected bills or invoices,
  • paying employees,
  • growth opportunities,
  • emergencies, or
  • any other small business expense.

Seasonal businesses often rely on a credit line for working capital needs. Seasonal businesses may need to prepare for the high season, such as by buying inventory or raw materials. Or they may simply need money for cash flow to meet short term needs.

Some banks let you link your business line of credit to a business checking account as overdraft protection to avoid costly fees.

How to Access Funds

There are three main methods to access money from business lines of credit:

  • Checks: The lender typically issues checks to the borrower upon the account opening. Then the borrower writes checks for specific amounts.
  • Debit Cards: Depending on the lender, borrowers may also be issued a special debit card (such as a MasterCard) to access money.
  • Balance Transfers: If a business line of credit is through the same bank as the owner’s checking account, transferring cash into a checking account is especially easy. In those situations, the owner often can transfer funds online, by mobile app or even by phone into a business bank account.

Each time you write a check, withdraw or transfer a sum, you are borrowing money from the line.

How do You Qualify for a Business Line of Credit?

Most lenders have three minimum qualifications you must meet:

Time in business: You must have been operating and in business for a minimum amount of time. Most lenders require a minimum of one or two years of time in business.

Annual revenue: Your business must have a minimum amount of annual revenue. Once again, this varies by lender. Some require as little as $25,000 in yearly sales — although that would be unusual. Most lenders want to see at least $100,000 in annual revenue. For some credit line products you may need $250,000 or more. For the most favorable terms or a long-term line of credit, you might need a much larger revenue number, such as $1 million.

Credit history: You must have an established credit history including a good personal credit rating. Credit scores of around 600 usually are a requirement. Here again the credit score requirement varies by lender. A poor credit score may not prevent you from getting a credit line — but you may end up with less advantageous terms, such as a higher interest rate or lower credit limit.

About 79% of small business owners who apply for business lines of credit are approved for at least some amount. That’s according to the Federal Reserve Bank’s 2020 Small Business Credit Survey, as this chart shows.

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business line of credit approval rate

Documentation for a Business Line of Credit

The lender underwrites business credit lines just like any other loan product. The lender also performs a check of your personal credit score and business credit score.

Every lender’s requirements differ, but lenders typically ask for the following type of documentation for a business line of credit:

  • Personal and business tax returns (last 2 years)
  • Bank statements
  • Balance sheet
  • Profit and loss statement (P&L)
  • Accounts receivable aging report
  • Personal financial statement showing the owner’s net worth
  • Business documents (such as LLC or incorporation articles)
  • Tax ID number / social security number
  • Information about other owners (if any)

You can generate the balance sheet, P&L statement and accounts receivable report easily using most accounting software. The lender usually supplies a standard form for the financial statement.

Some lenders ask for a business plan but most small business owners don’t have one. So the lender usually settles for a brief description of the business. The loan officer will also ask questions during the application process.

How Much Will a Line of Credit Cost?

A variety of factors affect your costs. Each lender varies. The lender will disclose costs up front, but be prepared for the following:

Fees: Sometimes there is an origination fee charged when you first are approved. Also, most lenders charge a modest annual fee or maintenance fee, such as $100 a year.

Interest Rate: Interest rates on a business line of credit typically range between 5% up to around 15%. However, rates can go higher. The lender will quote a specific rate upon loan approval.

  • Often the interest rate is quoted as “prime +” which means that it is based on the current prime rate, plus an additional percentage. Currently prime is 3.25%. So if a lender charges prime + 1.75%, your rate would be 5% at present.
  • Those with an excellent credit history generally get better rates. Read: How to Build Business Credit.

The lender will assess how big of a risk you are. The more risk the lender perceives, the higher your costs. Risk factors include:

  • The amount you request. Higher amounts mean more risk for the lender.
  • The nature of your business or industry. Some industries are riskier than others.
  • Your length of time in business. Brand new businesses are riskier to the lender than those with a longer track record.
  • Collateral. The more assets you have for collateral, the less risk for the lender

Secured vs Unsecured Credit Line

A business line of credit can be either unsecured or secured. It depends on what the lender offers. Secured means that the lender requires collateral to ensure repayment. Unsecured means that no collateral is required. Here is a comparison of secured vs unsecured:

Unsecured Line of Credit

Unsecured business lines of credit have higher interest rates and usually have smaller maximum limits. For instance, banks like Wells Fargo and Bank of America currently offer versions of an unsecured line of credit for small businesses. The maximum in each case is $100,000. The interest rate charged usually is higher than a secured line.

An unsecured business line is good for startups or young businesses. Unsecured lines are also good for service businesses that do not have a lot of assets to serve as collateral.

Secured Line of Credit

A secured line of credit is usually for larger amounts. For many lenders, secured lines of credit are standard.

Most are secured by a blanket lien on accounts receivables, usually through a UCC filing in your state. The lender may also take other collateral such as equipment, banks accounts or inventory to secure a larger line of credit.

Secured business lines of credit may charge a lower interest rate with better payment terms than unsecured.

Business Line of Credit vs Credit Cards

As mentioned above, a small business line of credit is similar to a credit card. But there are real differences:

  • Interest Rates – A business credit card usually has a higher rate of interest — 15% to 24%. Business lines of credit, on the other hand, may be 5 to 15%.
  • Fees – If you are unwise enough to take out cash advances on your card, the interest rate can exceed 25%. On top of that, you may have to pay a cash advance fee. A business line of credit is more cost effective for cash advances.
  • Rewards – But what about rewards programs? If a credit card has a rewards program, then the cash back may offset some of the interest. However, most cash back is only 1% or 2%, so costs are still high.
  • Introductory Offers – Some business owners get lured in with a low introductory credit card offer. But that attractive introductory rate may last only for the first 90 days or 6 months.

When to Use a Credit Card

Credit cards are a good choice for small expenses or when you need convenience. For example:

  • Convenience – credit cards are convenient for business travel and online purchases in particular.
  • For small expenses – If you need to buy a small amount of office supplies or pay for a business lunch, business credit cards are ideal.

Business lines of credit are better where a credit card would be too expensive.

Difference Between Line of Credit and a Loan

A small business line of credit is very different from a regular business loan. A business loan is close ended — a fixed term that last longer than a line. Also, with a loan you must take the entire loan amount all at once.

When to Use a Business Loan

Business loans are a better choice than a business line of credit for any situation where you need more than a few months to repay the money or it’s a large capital investment. For example:

  • If you are buying an office building, a business line of credit would be a terrible choice because the repayment term is too short. Commercial real estate mortgages, by comparison, have longer repayment schedules — 10 to 25 years.
  • If you are buying expensive equipment it might be wise not to tie up a chunk of your working capital for a large planned investment. Instead, look into financing from the manufacturer or a term loan.

By contrast, business lines of credit are good for short term needs where it is not worthwhile to take out a business loan. For example, assume you are experiencing a temporary cash flow dip. You expect it to be resolved within 60 days when some large invoices are paid. A small business line of credit is perfect in this situation.

Summing Up the Advantages

A business line of credit allows the owner to sleep at night. Lines of credit are great for contingencies. It’s comforting to know that you’ll have necessary operating funds to manage your small business finances, despite temporary shortfalls in revenue or if surprise expenses hit. As one small business owner told us about lines of credit, “The money is there if you need it.”

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4% of Small Businesses Looked to Family, Friends for Help During COVID

4% of Small Businesses Looked to Family, Friends for Help During COVID


Nearly eight in ten small businesses have received aid from the federal government since the coronavirus pandemic began, but only a small percentage have sought help from local sources, including family or friends.

A recent study by LendingTree analyzed results of the U.S. Census Bureau’s Small Business Pulse Survey to find the percentage of small business owners in the 50 largest metro areas who had reported requesting financial assistance from state or local government and family or friends.

LendingTree Survey on Pandemic Loans from Family and Friends

About 5% of businesses asked for help from state or local governments, while just over 4% sought aid from family or friends, according to the census bureau.

Small businesses in the Washington D.C. metro area led the way in seeking help — 14.9% from state and local governments, and 4.1% from family and friends. Baltimore-area businesses came in second, with 13.9% seeking help from state and local governments and 2.9% from family and friends.

Birmingham, Ala. ranked last among the 50 largest metros in requesting local support, LendingTree results showed. None of the small businesses in the area asked state and local governments for help, and less than 1% sought aid from family or friends.

“As the data shows, small businesses haven’t turned en masse to their local communities for emergency aid,” said Derek Miller, senior research analyst at LendingTree, who reported on the issue. “The general belief was that after business shutdowns eased … businesses could begin to return to normal operations.”

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With the August 8 deadline for applying for PPP aid now passed, and state and local governments already looking to cut their budgets, local communities may be one of the few sources left for small businesses to look for help. How much they will be able to support their local businesses remains a question, however.

“[W]e may see some kind of small business crisis in the same way we could see an eviction crisis now that the coronavirus relief bill unemployment benefits have expired,” Miller said.

Visit the LendingTree website to read the full study findings.

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Small Business Bank Loan Approval Rates Improving, New Biz2Credit Data Shows

Small Business Bank Loan Approval Rates Improving, New Biz2Credit Data Shows


There was an encouraging rebound for small business loan approval rates for banks and non-bank lenders during July. This is according to the Biz2Credit Small Business Lending Index released recently.

The approval rates show an increase of 0.3% in the approval percentage for small business loan applications at big banks. This approval rate increase does not include Paycheck Protection Program (PPP) loans. It also only applies to big banks with $10 billion or more in assets.



Biz2Credit Lending Index July 2020

The small business loan approval rate was 13.5% in June and rose to 13.8% last month. Small bank approval rates rose 0.2% to 18.6%, with both big and smaller bank approvals still massively below February’s 50.3%.

Encouraging Approval Rate Trend for Small Businesses

While the loan approval rate rise appears incremental, the upward motion is still encouraging for small businesses in the US. This is clearly a small sliver of good news for small businesses who may need such loans to stay afloat. Customer numbers and revenues are still down for many businesses, but hopefully the upward trend will continue.

Other improvements in the labor market show that a slow resumption of economic activity continues. The health care sector has seen a significant jobs boost. There were also notable job gains in the leisure and hospitality, retail trade, business, and professional services sectors. A lot of these jobs have been created by small businesses who are clearly vital to the economy’s recovery.

Institutional Lenders ‘Steadily Climbing Back’

The monthly research by Biz2Credit is overseen by their CEO and leading small business lending expert, Rohit Arora, who commented: “There was clearly an uptick in the economy, especially in the northeast in July. The big banks played a key role in PPP lending and are making other loans to their customers as some of them have exhausted their PPP funds.

“It will be interesting to follow lending at big banks as coronavirus spreads through the south and west regions of the country.”

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Arora also said that regional and community banks are now making other types of loans available to new customers. Previously they had only been making a lot of PPP loans available to small businesses.

“The smaller banks are now in a good position to resume making SBA 7(a) loans and other funding requests,” added Arora. “Institutional lenders, like the other types of lenders, are steadily climbing back after disastrous results in March and April. They continue to play a strong role in small business lending.”

Alternative Lenders and Credit Unions Continue Struggling

The loan approval rate increase among big and small banks is unfortunately in contrast to the rates among alternative lenders. They dropped 0.3% between June and July. The loan approval rate for alternative lenders now stands at 23.1%.

Credit union approvals also saw a slight drop in July, approving 21.2% of loan requests. That is a decrease of 0.15% to return to the same 21.2% approval rate from May.

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How to Fix Your Credit — 17 Ways

How to Fix Your Credit — 17 Ways


Do you know your personal credit score? What about your business credit score? Many people don’t know either. What’s more, most people don’t check their credit score before applying for a credit card, business loan, or personal loan. Some are shocked later on to discover that errors hurt them — errors they may have been able to correct had they paid attention.

Repairing credit has many benefits, including getting more financing, with lower interest rates and favorable loan terms. When you repair credit, it also puts you in a better position to achieve your goals. Whether your goals are personal, such as buying a new home, or business, such as expanding your facility, better credit scores increase your options.

That’s why the time to fix bad credit is now before you need to borrow money or bid on a new project. These tips for how to fix your credit will enable you to make positive changes in a short amount of time.



How to Fix Your Credit Yourself

Here are some tips on how to improve your credit score, both personal and business:

1. Check Your Credit Reports

You must know your credit score to fix bad credit, and the best way is to check your credit reports using Experian, Equifax, or Transunion. You can get a free credit report for personal credit — many companies make that available — but business credit scores are another matter.

First, the three credit bureaus — Dun & Bradstreet (D&B), Experian, and Equifax — each have different scoring models and types of reports. Second, most are not free credit reports for a business. For instance, a single standard credit report from Experian costs $39.95, while Equifax prices start at $99.95.

Tip: The credit monitoring service, Nav.com offers free credit report copies of your Experian, Equifax, and D&B scores for your business.

2. Identify and Dispute Any Errors

Don’t just access these sources to review your credit score. Examine the factors credit agencies use to determine the rating and investigate those that affect your score specifically. Errors are common. In fact, 25% of these reports do contain serious errors. So check them carefully. Removing negative information is an essential part of your credit repair efforts.

Identify any apparent errors you find and dispute them with the bureaus and the creditor or information source. You can file disputes on each of the credit reporting agencies’ websites.

Typical errors include:

  • Personal information – problems with name, address, phone number,
  • Account problems – these could be accounts belonging to someone else, closed accounts showing as open, accounts set up as a result of identity theft, or accounts incorrectly reported as late or delinquent or showing incorrect balances,
  • Inaccurate information – including non-existent bankruptcies or foreclosures,
  • Data errors – problems with how your credit was handled either by the credit agencies or another party,
  • Incorrect inquiries – Checks on your credit that might negatively affect your credit rating

In the dispute, identify and clarify each mistake, gather your documents, explain your reasons for disputing the information, and ask that it be removed or corrected.

Tip: Collect documentation prior to contacting a credit bureau to challenge items on your credit report. Credit bureaus require you provide proof of any errors in order to remove them from your credit report. As a result, you must present credit card statements, court documents or whatever else necessary to verify a credit report is in error.

3. Monitor Your Credit Score Regularly

Monitor your personal credit score regularly to check for changes. Your goal should be to get your score to 633 or above. You may be amazed to see the difference even small steps toward improvement can make. The reporting agencies update scores routinely, so check at least once a month. Also, some credit reporting agencies will send email alerts any time your score changes. Sign up for those if available.

Personal credit monitoring services typically make suggestions for how to improve your credit score, and some even track spending. As with any other metric, establishing a baseline and then monitoring changes will put you on a path to credit repair improvement.

In addition to individual credit reports, business credit reporting agencies offer annual subscription plans, which allow you to check your credit history, credit report, and score for one price. Charges can run into the hundreds of dollars, but it’s a way to stay apprised of your score and evaluate your credit repair activities. That can come in handy when you need to finance commercial real estate, office equipment, or fulfill another business need.

Tip: Just like with your personal credit score, check your business credit reports for accuracy. You can also contact the business credit bureaus and add information to your business profile, so the bureau has a more complete history.

4. Make Payments on Time

Nothing affects a credit score more adversely than a history of late payments.

Payment history makes up 35% of your FICO Score, according to Experian, and FICO Scores are used in 90% of credit decisions. Late payments also stay on your credit report for up to seven years. Plus, their presence on a credit report, including the total number, how late they were, and how recently they occurred, are correlated with future credit risk. People without a late payment are much more likely to pay on time in the future.

Now your credit card or loan statement may say a payment is past due after 15 days. However, for credit reporting purposes, a payment isn’t considered past due until after 30 days. Once you pass that deadline, your creditors can choose to report you to the credit bureaus, impacting your creditworthiness.

Make it a priority to pay your creditors on time every month. Even if you made payments late in the past, you begin to build credibility that will result in higher credit scores in time.

Tip: Track your payments carefully paying those closest to passing the 30 day mark first. Setting reminders is an excellent way to ensure you never miss a payment. There are several ways to do this:

  • Calendars on your computer or mobile device,
  • Text or email reminders from your bank or credit card lender,
  • Automatic payments via your business bank account.

Regarding the last option, make sure you have sufficient funds to cover the draft. Overdraft fees will eat away at your balance and could hurt your credit score rather than help it. )

5. Don’t Have a Separate Business Entity? Establish One

Credit bureaus can’t track your payment history if they don’t know your company exists. That’s why its best to make your business a separate entity. You can do that in several ways:

  • Set up a corporation or LLC – These structures will help you minimize personal liability for the business.
  • Get an EIN (Employer Identification Number) – You get this from the IRS, and it’s required if you have employees or are an S corporation.
  • Get a D-U-N-S Number – A D-U-N-S Number is a unique identifier Dun & Bradstreet assigns to track financial transactions of businesses. It means D&B has validated your company, something lenders and vendors rely on when deciding whether to do business with you.
  • Get a business phone – Having a business phone number builds credibility. Plus, you’ll need it to register for a D-U-N-S Number.
  • Open a business checking account – Commingling business transactions with personal is a recipe for trouble, especially during tax time when you have to look for deductions. That’s why it’s imperative to maintain a strict separation between personal accounts and business accounts.

Tip: Deposit all business revenues into the business bank account and pay yourself a salary or transfer funds from the business account to your personal account — not the other way around,

6. Lower Your Credit Utilization Rates

Small business owners need to keep credit utilization rates on both personal and business credit cards low. Under 30% is recommended. That’s important because credit utilization is the second most important factor in credit scores, right after payment history. Your credit utilization rate is calculated by taking the total of all your credit card balances and dividing it by the sum of all your credit card limits.

It’s to your benefit to keep your credit utilization under 7%. That puts you in the“very good” credit score range of 740-799. Even better, holding it between 1 and 3% can give you an “exceptional credit” score of 800-850.

Do not have 0% credit utilization, however. You aren’t building credit if all your credit cards show no balance. In fact, your score could be lower. So use both your business and personal credit cards and lines regularly, but pay them down or off early every month.

7. Increase Your Credit Limit by Opening New Credit Cards

One way to lower your credit utilization rates is by applying for another card. This generates a hard inquiry, which lowers your credit score in the short-term, but the added credit amount will increase your score in the long-term.

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This, in turn, helps your credit repair efforts and offset credit card amounts that exceed the 30% recommended limit by increasing your available credit limit.

A problem arises, however, if you run up the balance on the new card. Your credit utilization percentage goes back up as do your credit balances. But as long as you don’t increase your credit card balances, an upturn in your credit limit should reduce your utilization rate and improve your credit scores.

Tip: Beware! Don’t apply for several credit cards within a short period. Too many “hard” credit pulls will damage your personal credit.

8. Pay Down Business Debt

Another way to lower your credit utilization rates is to pay down as much business debt as possible. Consider this simple strategy for credit repair. Either pay down the account with the highest annual percentage rate or pay off the lowest balance.

Say you pay on two accounts. One charges an annual percentage rate of 20%. The other boasts a much lower annual percentage rate of 9%. Pay down the balance on the account with the higher percentage rate first. This decreases the overall interest owed and improves your credit history.

On the other hand, say you have new credit, Perhaps you just bought a new laptop for $500. Consider paying off this low balance first. You may need to make minimum payments on your other accounts. However, paying down this balance fast looks great on your credit report.

9. Open a Business Credit Card Account

A business credit card gives your company credibility and helps establish good business credit or improve business credit ratings. It’s also another way to separate business expenses from personal. Putting all your business transactions on a card intended for that purpose comes in handy during tax time, making figuring out deductions a much easier task.

Just as with a personal credit card, make small purchases with the new credit card and pay the account off in full each month. Do this for several months to establish a track record of timely payments on new credit. This process demonstrates creditworthiness when you need funding to grow your business. Just make sure the new credit card company is one that reports to a business credit bureau.

Here’s another reason to get a new credit card for your business. Even though your personal credit score will be affected short-term due to the hard inquiry, the business line of credit is separate from your personal credit. That means whatever happens with your business card should not affect your personal credit score.

10. Learn to Build Your Business Credit

Establishing a business credit history is a challenge for startups and smaller businesses. This is why setting your business up as a separate entity is so important. Fleshing out your business credit history is too.

Learning how to build business credit is vital to fixing a bad credit score, so start taking actionable steps to achieve that goal right away.

Tip: A useful first step is to purchase business credit reports, to see if and how your business appears on these. Also, create? ?a? ?profile? ?with? ?the? ?three business? ?credit? ?bureaus: Dun & Bradstreet, Experian, and Equifax.

11. Add Positive Trade References

Another credit repair strategy is to do business with “trades” that report to business credit agencies. Not all vendors and suppliers share payment data, but the bureaus can tell you which ones do.

To calculate its PAYDEX score, Dun & Bradstreet requires a minimum of three trade references which you can add. Having a low score can result in higher interest rates, smaller loan amounts, or the inability to raise capital. That’s why you want to add “positive” references, those that will help you build good credit.

12. Keep Older Credit Accounts Open

Pay off existing debts when you can, but don’t close the account. Your oldest accounts are valuable. The reason is that length of credit history is a major factor credit agencies use to determine your score. The older these accounts are, the better. That’s particularly true if you haven’t had any recent slip-ups such as late payments or delinquencies.

Another way old accounts help is by again reducing your overall credit utilization. You will have a lower credit utilization percentage if the account is open but has a zero balance.

Different credit bureaus weigh the importance of credit age differently. FICO factors it in at 15% of the total score, for example. Regardless, keeping those old accounts open will help boost your score.

13. Diversify Your Credit Mix

How much credit you have, the balances owed, payment history — all of that factors into your score. Your credit mix does too. It counts for as much as 10% of your overall rating.

What’s a credit mix? It’s the variety of credit you have in your profile.

Essentially, there are only two types of credit that apply: installment and revolving. Installment credit includes things like mortgages, car loans or term loans. They have a fixed end date with payments due every month. Revolving credit includes credit cards or lines of credit. These are accounts that have no fixed end date or set amount due each month.

Ideally, you want a mix of both. It demonstrates that you can manage multiple types of accounts. Having only one or the other will make it harder to increase your score.

14. Get Authorized to Use Someone Else’s Account

Becoming an authorized user on another person’s credit card account can give your score an immediate boost. Just be sure it’s with a person who has a better credit score than you!

There is a risk for the person authorizing your use. According to the law, authorized users are not the persons responsible for repaying the debt. That burden falls to the primary user. Also, this form of “piggybacking” credit doesn’t necessarily help the authorizer build his or her credit so much as it does the person with a low score.

15. Apply for a Secured Bank Loan

If you are unable to get a loan based on your creditworthiness, apply for a secured bank loan. A secured loan is based on collateral, such as a car, CD, savings account, or equipment. If you are unable to make payments, the lender can seize your asset, which means you take on additional risk. But, timely payments over a long period can benefit you with a higher credit score.

16. Negotiate to Remove Delinquencies

One way to remove a negative mark on your credit such as a delinquency is to contact the creditor to try and negotiate a partial payment. In turn, the creditor agrees to reclassify the debt as “paid.” Assuming you strike a deal, get the agreement in writing and pay only once it’s in hand.

17. Get an Immediate Credit Boost

Experian offers a way to improve your FICO Score “instantly,” according to the website. It’s through a program called Boost, a free opt-in service that allows users to add cell phone and utility bill data to their credit history. It works by connecting the bank account they use to pay those bills to Experian. Assuming payments are made on time, users should see an immediate score increase.

Credit Repair Pays Off

It will take time and focused effort, but you can repair your credit and improve your credit scores. However, you must make it a priority to repair your credit stick with it. Follow the steps outlined above, and you will see. The benefits will pay off in the form of the capital you need for business growth. In the meantime, if you need options while your credit scores are low, check out these business loans for bad credit.




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Business Loan Terminology You Need to Know

Business Loan Terminology You Need to Know


Business loan terminology can be confusing. Most small business owners would rather grow their companies than talk about loan interest and finance charges. That said, if you approach a lender without knowing loan terminology you could be — well — borrowing trouble.

Fortunately, we’ve created this glossary of loan definitions that a small business borrower must know in order to make informed choices. Knowing these terms will help you understand small business funding options and the obligations that come with them.

Annual Percentage Rate

Annual percentage rate or APR is a calculation used in small business credit products to enable the borrower to compare how much credit actually costs. For example, you could compare the APR on two business credit cards. This gives you a truer comparison of the cost of credit. Don’t confuse APR with simple interest rate. Interest rate refers only to the interest you pay on the money you’ve borrowed. However, APR includes other fees over and above interest. These fees could include origination fees, check processing and maintenance fees.

Amortization

Amortization is the allocation of payments to pay off a loan within the stated repayment period. Amortization schedules apply most of the money in early payments towards paying down the interest. Later, larger potions of each payment go to repay the principal. See an example of an amortization schedule by running our business loan calculator.

Balloon Payment

A balloon payment is a lump sum payment due at the end of a loan term. A balloon payment implies that monthly payments are not enough to pay off the loan in full, but instead a lump sum will be due. Loans with balloon payments are typically short-term loans that keep loan payments low until the term is due.

Borrower

A borrower is a person or business taking money from a bank or other lender with an agreement to repay the loan. The borrower promises to make payments on an agreed upon schedule including interest and other fees. The borrower signs a loan agreement or other debt instruments.

Bridge Loan

A bridge loan is a loan meant to cover expenses until more permanent financing becomes available. In business, bridge loans cover payroll, inventory and other costs. They often have high interest and are intended to be paid off in under a year.

Cognovit Note

A cognovit note is a promissory note where the borrower grants the note holder the right, in advance, to get a judgment without lengthy court litigation. A cognovit note is sometimes called a confession of judgment because the note holder “confesses judgment” on behalf of the borrower, in court, in the event of default. Today, its use is severely curtailed by law. Confessions of judgment notes are legally recognized only in a few states, including Ohio, Delaware, Virginia, Pennsylvania and Maryland. Business owners should know this loan terminology and avoid  cognovit notes because it means giving up valuable rights.

Co-signer

A co-signer is any third party on the hook for loan repayment along with you. A business cosigner is sometimes called a guarantor. The guarantor must sign a document guaranteeing to make payments if you default and cannot pay. An established business owner with good credit usually does not need a cosigner. However, a startup entrepreneur may be required to have one, and should line up potential co-signers such as an established business owner or family member.

Credit Line

A credit line or line of credit is revolving credit that a borrower can borrow from as needed, up to an approved maximum limit. The borrower only withdraws sums as needed, and will be charged interest only on such amounts, not on the maximum approved limit. A loan is different from a line of credit because it requires you to take out the full loan amount at the beginning. With a loan you must pay interest on the full loan funds until fully repaid.

Credit Report

A credit report details the credit history of a borrower or applicant and includes a credit score issued by recognized credit bureaus. For small business loans, lenders often look at the both the owner’s personal credit report and the business’s credit report, among other business loan documents. Credit reports detail the creditworthiness of a person or business. They help lenders decide whether to approve credit and at what terms. Read more in: business credit score.

Debt Instruments

A debt instrument is an agreement between a borrower and a lender saying the borrower will repay the money borrowed or invested. Two examples of debt instruments include the promissory note and the loan. The terms of the promissory note or terms of loan might include interest, collateral and a schedule to repay the loan.

Debt-to-Income Ratio

Debt-to-income ratio refers to the percentage of income a business or individual uses to pay debt. Lenders use this percentage to decide whether a borrower can afford another loan. An entrepreneur may have a student loan and other significant debts. A high debt to income ratio raises questions about whether a person can afford additional monthly payments.

Fair Market Value

Fair market value refers to the property value, i.e., the purchase price of realty or other collateral a buyer would be willing to pay on the open market. The fair market value is calculated by looking at factors like the value of similar property or assets. A mortgage lender will order a property appraisal to determine whether there is sufficient collateral to justify a loan, when collateral is required.

FICO score

The FICO score is a measure used to evaluate an individual’s credit risk for lending purposes. Fair Isaac Corporation of San Jose, California created the FICO score. The score is similar to methods developed by companies like Equifax to measure an individual’s creditworthiness.

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Gross Income

Gross income is the total earnings of an individual or business before taxes or costs are subtracted. For individuals, gross income equals your total earnings minus taxes and mandatory deductions. For businesses, gross income refers to revenue over and above payroll, taxes, debt obligations and any other costs associated with operating the business. Net income, by contrast, is after certain costs are subtracted.

Interest Payments

Interest payments refer specifically to the part of the borrower’s monthly payment that goes to pay down interest. Interest payments differ from the part of the payment amounts that go to pay down principal. Interest payments may differ because of amortization. They may be higher at the beginning of a loan but lower near the end.

Loan Commitment

A loan commitment is the name for the agreement a bank or other lender draws up when loaning an individual or business money. Lump sum loans and lines of credit both require these commitments. The same agreements are used for both secured and unsecured loans.

Net Worth

The net worth of a person or business is the difference between what that person or business owns and their liabilities. Some lenders ask for a business owner’s net worth statement, to use as a benchmark to ensure the borrower can afford credit. Use this net worth calculator to calculate it.

Origination Fee

Not all costs associated with a loan are part of the principal or interest. An origination fee is the money the lender charges you to cover the costs of managing your loan.

Personal Guarantee

A personal guarantee is when a business owner personally guarantees in writing he or she will repay a loan if a business doesn’t. However, a personal guarantee is unsecured just like an unsecured loan. As a result, there are no personal assets used as collateral.

Prime Rate

The prime rate is also called the prime loan rate. The prime rate usually refers to a rate published by the Wall Street Journal. Prime rate is used as part of a formula for setting small business loan rates. For example, you may see a small business loan’s rate quoted as “prime + 3.5%.” This means that the interest rate starts with the prime rate and tacks another 3.5%. If prime is 3.25% and you add 3.5%, it means the rate charged will be 6.75% in our example.

Principal and Interest

Principal is the amount of money the borrower borrows. Interest is the amount the lender charges on the loan balance. Principal and interest or P&I usually refers to the monthly payment amount including a portion for principal repayment and a portion for interest.

Promissory Note

A promissory note is a debt instrument you sign agreeing to repay money you borrow. The terms of the promissory note set out the loan principal, monthly payments, repayment period, interest rate and other terms. The promissory note is part of the loan documents, which may include separate covenants, mortgages, UCC filings and more. The lender prepares the promissory note, and usually it is a standard form document. Wording of the note is not usually negotiated.

Refinance Transaction

A refinance transaction involves taking out a new business loan with more favorable terms and using the money to pay off your existing loan. Refinance transactions done correctly help lower the interest rate, lengthen the term or give other favorable terms. Business debt consolidation is similar, but takes multiple debts and combines them into one.

Repayment Period

The repayment period is the time it takes to make all payments due on a loan. The repayment schedule begins with the first payment on the loan and ends when the loan is finally paid off or a balloon payment is due. Another way to describe the end of the repayment period is to say the loan has reached its maturity.

Title Insurance

Title insurance is an insurance policy guaranteeing the title to real estate is clear. A title report protects again liens and claims against real property. An owner’s policy protects the property owner and is part of purchase transactions. A lender’s policy protects the lender in a real property loan transaction. A title company conducts a title search checking unpaid property taxes, liens and other details in the property’s history. A title insurance company writes the policy charging insurance premiums. The lender make title insurance mandatory in any commercial real estate transaction.

Unsecured Loan

If you have good credit, you may be able to get an unsecured personal loan. This is a loan based on your personal creditworthiness. The benefit is you don’t need collateral such as property or other assets. However, you may see a higher interest rate because the loan is a bigger risk for lenders.

What are Common Loan Acronyms?

Business lending uses various loan terminology abbreviations. The table below includes a list of common acronyms used in small business lending.

Acronym Definition
APR Annual Percentage Rate
ARM Adjustable Rate Mortgage
CDC Certified Development Company
CPI Consumer Price Index
DTI Debt-to-Income Ratio
EIDL Economic Injury Disaster Loan
FDIC Federal Deposit Insurance Corporation
FRM Fixed Rate Mortgage
GAAP Generally Accepted Accounting Principles
HELOC Home Equity Line of Credit
LIBOR London Interbank Offered Rate
LTV Loan-to-Value Ratio
MI Mortgage Insurance
MSA Metropolitan Statistical Area
NAICS North American Industry Classification System
NCUA National Credit Union Association
P&I Principal and Interest
PPP Paycheck Protection Program
SBA Small Business Administration
SBDC Small Business Development Center
SCORE Service Corps of Retired Executives

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How to Check Business Credit

How to Check Business Credit


You likely know your personal credit score, but you may not know your business credit score. The two credit scores are not the same, although they serve a similar purpose. Your personal credit score illustrates how well you pay your debts on time. And your business credit score demonstrates your company’s ability to pay its debts in a timely manner.

You should review your business credit report for the same reasons you check your personal credit score: to find and fix errors, learn what may be helping or hindering your score, and establish a baseline to improve your score.

There are also two other significant reasons to check your score: Your customers, suppliers, and business partners can access your score for a fee, to determine your creditworthiness. Lenders examine your business credit report as well, to decide whether to approve you for small business financing and at what interest rates.



How to Check Your Business Credit Score

Many business credit reporting agencies exist, but the best way to check your business credit score is to start with one of the major business credit bureaus: Dun & Bradstreet (D&B), Experian, and Equifax. These provide the most comprehensive information you can find, although none are free to use, with certain exceptions.

1. Dun & Bradstreet

With over 70 million business credit listings, Dun & Bradstreet is the largest of the three.

To get a report from D&B, you must first apply for a D-U-N-S Number, a unique identifier that D&B assigns to your business to establish your file (sort of like a business “social security number”).

D&B also has its own scoring mechanism — PAYDEX — a dollar-weighted numerical indicator of how a company paid its bills over the past year, based on trade experiences reported to D&B by various vendors.

Once you have your D-U-N-S number, you can sign up for Credit Signal, D&B’s free credit monitoring service, which lets you know when your score has changed. It only monitors your business credit score, however; you still have to pay for access to reports.

Speaking of which, D&B offers three different products as part of its business credit score lineup:

  • There’s CreditBuilder Plus at $149 per month,
  • CreditBuilder Premium at $199 per month,
  • And CreditBuilder Concierge. You must contact D&B for pricing on this.

Each of the options includes CreditSignal as well as an expedited D-U-N-S Number and D&B credit file.

2. Experian

Unlike D&B, which is a business-only credit reporting bureau, Experian aggregates credit information for both individuals and businesses.

Experian Business Credit provides access to business credit information on more than 27 million credit-active businesses in the United States. It offers a range of purchase options:

  • CreditScore report – single standard report ($39.95)
  • Profile Plus report – single report offering more detailed information ($49.95)
  • Valuation report – a single report showing a business valuation ($99)
  • Business Credit Advantage – an annual subscription that offers unlimited access to scored reports ($189)
  • Business CreditScore Pro – the most expensive and comprehensive plan ($249 per month; $1,495 annually)

The available options provide varying levels of detail, from the basic facts of a business to in-depth business credit, payment, and public record histories. The company also provides international business credit reports for $59.95 each.

3. Equifax

Equifax also offers personal and business credit reports. The business reports provide in-depth information that includes a company profile, credit summary, public records, and business credit risk scores.

Prices range from $99.95 for a single report to $399.95 for a “multi-pack.” It includes five reports (5 for the price of 4 the company says), which you can access any time over 12 months.

Each of these bureaus likely has a credit profile of your business, but you will need to set up an account and claim it for updating purposes.

D&B lets you update your company’s information for free using its D-U-N-S Manager service, but Experian and Equifax require you to purchase a business credit report first.

If you believe your company’s Experian data contains inaccurate or outdated information, you can initiate an update by going to the Business Credit Facts website. Equifax has an online dispute center to submit or view the status of a dispute.

Where to Check a Business Credit Score for Free

Consumers have lots of free places to get their personal credit reports and scores, but businesses don’t have that luxury. Most, like the three listed above, require you to pay to review the information they have on your business.

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Nav.com is one place where you can access free business credit information from Dun & Bradstreet, Experian, and Equifax, with no credit card required. Setting up an account only takes a few minutes. It gives you business credit grades and summaries of your Experian Intelliscore and Dun & Bradstreet Paydex report, as well as your personal credit score from Experian, and tools to help you learn how to build your business credit.

Creditsafe is another source to find free credit scores and reports. Signing up for a free trial gets you access to up to 50 domestic business credit reports, which include business credit scores and limits, core business data, and payment information.

How to Run a Credit Check on a Business

As important as it is to check your business credit report, there are times when you will need to run a credit report on other companies as well — to gauge how likely they are to pay their invoices on time, how much of a credit risk you will be taking on, the amount of credit to extend, and whether they are worth the headache.

Regardless of the reason, checking their credit scores could give you critical information to make the best financial decision possible. All three major credit bureaus facilitate such requests. Typically, all you need is the business’s name and address to process the request.

D&B Credit Reporter

Dun & Bradstreet has an entire line of credit checking options, all residing under the banner “Credit Reporter.” Depending on which you choose, D&B provides a credit summary, business credit risk score, and financial stress score. Reports also include a PAYDEX score, which helps you determine your risk in extending payment terms to the business in question.

Credit Reporter products include:

  • Credit Evaluator Plus – $61.99
  • Business Information Report – $121.99
  • Business Information Report On-Demand – $189 (gives you access to five D&B credit scores and ratings and continuous monitoring of a company’s business credit file)
  • Credit Reporter Plus – $799 (you get access to multiple companies)

D&B also offers a free report, but it comes with a catch: You have to sit through a product demonstration to qualify. You are limited to one free report per D&B D-U-N-S Number.

Experian

Experian’s Business Information Services provides comprehensive, third-party-verified information on 99.9 percent of all U.S. companies.

The information is continually updated and includes the Experian business credit score (both the Intelliscore Plus and Financial Stability Risk rating), credit trade payment information, corporate registration, public business records, and key personnel.

An Experian one-time standard report will cost $39.95.

Equifax

Equifax business credit score reports include public records information (like bankruptcy) and a business failure score. That predicts how likely it is that a business will fail in the next 12 months, along with possible reasons why.

The Equifax reports may also include business demographics, payment history, and any other people or companies associated with the business.

A one-time business credit report costs the same as a report on your own company, $99.95.

Credit Checks by Landlords

It’s not just business owners who need to run credit checks from time to time on customers, vendors, and business partners. Landlords may also want to run a credit report on business tenants. There is no better way to determine a tenant’s creditworthiness than looking at the business’s credit history.

Please understand, there is a difference between checking the business credit of a business tenant and doing a background check on a personal tenant. Experian offers comprehensive background checks as part of its services. To see a full list, read the Small Business Trends article “15 Best Places to Get a Tenant Background Check.”

Regularly Monitor Your Business Credit

By now, you should need no further persuasion that knowing your business credit score, how to get it, checking it regularly, and keeping it error-free is of great value.

The bottom line: A good score is your ticket to more favorable financing and a way to ensure suppliers, business partners, or customers will want to do business with you. Also, knowing how to check other businesses’ credit reports and scores is a way to stave off problems and protect yourself against unnecessary risks. It pays to be prepared, and now that you know, you have no excuse!

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Can I Get Business Loans After Bankruptcy?

Can I Get Business Loans After Bankruptcy?


“Can I still qualify for business loans after bankruptcy?”

It’s a question small business owners and aspiring entrepreneurs who have suffered that fate may ask when looking for financing. If you want a fresh start, a past bankruptcy need not be a life sentence. It is possible to get approved for a business loan after bankruptcy.

Realistically, it will require you to put together a strategy and expend extra effort. And it may take a while and involve a series of baby steps, but in time it is possible to overcome the effects of bankruptcy on your financial prospects.

A bankruptcy will stay on your credit history for 10 years in the case of Chapter 7 and seven years from the filing of Chapter 13. Also, expect your score to plummet — 130 to 240 points depending on your credit score, according to a FICO scoring model. Nevertheless, you can take action to improve your chances of getting that business loan or find capital from alternative sources.



How Do I Get a Business Loan After Bankruptcy?

Getting a business loan following a Chapter 7 bankruptcy or Chapter 13 bankruptcy will be tricky, especially in the current economic environment. The following strategies can help:

1. Get a Secured Credit Card

Secured credit cards require a cash payment as collateral (That’s why they’re called “secured.”) That deposit serves as your line of credit. While it’s not the ideal, secured cards are a way to rebuild your credit and have the functionality of a credit card for purchases.

2. Pay Your Bills on Time

We cannot overstate the importance of paying bills on time. It has the greatest impact on your credit score of all the contributing factors. If you do it long enough, you prove to lenders than you can manage your finances and stay out of trouble.

3. Consider Alternative Lending Options

Banks and other traditional lenders may be reluctant to offer a loan after bankruptcy — federal and state regulators tie their hands. One option is alternative lenders that provide term loans and lines of credit, albeit at higher interest rates and fees. Your chances of getting small business loans for bad credit are higher; just understand the risks and potential liability if you’re unable to make payments.

Revenue-based financing, such as merchant cash advances or invoice factoring is another option — so long as your business is bringing in solid sales. These financing sources generally aren’t that concerned with your credit score, although they may run a soft credit check on your personal or business credit.

Asset-based loans are yet another option worth considering, particularly when approaching a bank.

“Traditional lenders are going to look to cash flow, assets, or some type of security,” said Luis Salazar, a bankruptcy attorney in Miami, Florida, in an interview. “The best security is a strong piece of collateral that you know you could sell to recover your loan.”

Another option, crowdfunding, isn’t dependent on credit scores, but you’ll need to invest in a marketing campaign or have a loyal customer base willing to pitch in.

4. Get a Cosigner

Some lenders allow you to apply for a loan using a cosigner. The risk to the cosigner is that they become responsible for the loan if you fail to make payments on time or, worse, default. Also, they receive no benefits to their credit if you repay on time. Make sure the person understands those risks before signing on the dotted line.

5. Present a Business Plan

Hari R. Ender, bankruptcy attorney, writing for Nolo.com, said, “Before you try to get credit for your business, make sure you have a solid, organized business plan to present to potential lenders. The industry in which you are seeking a loan might also make a difference as to your success.”

6. Share Bankruptcy Details with Lenders

Marina Vaamonde, a commercial real estate investor in Houston, Texas, advises business owners to create a timeline accompanied by a set of factual documents that will allow them to share their bankruptcy story.

“Include an overview of how and why you fell into bankruptcy,” she said. “Have a detailed explanation with examples of how you have been managing your business and finances after the bankruptcy. The presentation should allow the lender to learn more about your situation and have a more positive impact on your application.”

There is a place on your credit report to submit a brief explanation of what major event caused your financial difficulties and how it is different now. Typical causes are divorce, hospital bills, extended illness, or a car accident.

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7. Avoid ‘Reaffirmation Agreements’

You may volunteer to make repaying your creditors part of the contract — a “Reaffirmation Agreement” — even if you can discharge your debt. Salazar says that’s a bad idea that you should avoid.

“I’ve often had clients say they want to include paying certain creditors back as part of the terms of the bankruptcy,” Salazar said. “I tell them, you can always voluntarily pay someone back, but don’t file bankruptcy and make an agreement that you will pay them back, even though you feel an emotional and moral obligation. If your fortunes turn, you can always send money, but don’t agree to do that in the contract.”

8. Keep Your Credit Debt Level Low

Keep your revolving credit debt as low as possible — below 20% is best — to show that you are not overextending and can afford to make payments. Also, keep in mind that your personal credit affects business borrowing. (That’s especially true for minority business owners who rely heavily on personal scores.)

“If you are cash poor, make sure you don’t take on more loans post-bankruptcy, as it could hurt you,” said Leslie H. Tayne Esq., founder and head attorney at the Tayne Law Firm, in an interview. “Following bankruptcy, it’s not unusual to get credit card offers. Don’t put your personal credit on the line by taking everything you can and maxing out your available credit.”

She added that lenders will look at your personal credit report to see if you have been managing your finances responsibly. “A credit report tells a lot about a person,” Tayne said. “Getting over-extended again could demonstrate a pattern of behavior, making it harder to get a loan.”

9. Go the Friends and Family Route

If you are still having trouble getting a loan after bankruptcy, consider turning to friends and family. The Federal Reserve Bank 2020 Small Business Credit Study (PDF) found that 56% of business owners have relied on friends or family, as well as personal funds — the biggest source of financing — to finance their enterprise in the last five years.

If you decide to go that route, find someone with good credit who can add you as an authorized user to his or her account. Your credit use gets reported in both your name and the primary account holder’s name. Also, you may be able to get a friend or family member to cosign on a loan. Just make sure they understand the risk.

10. Bide Your Time

Our last piece of advice is to wait. It takes up to 10 years to discharge a bankruptcy. If you can’t wait that long to apply for a business loan, you may have to hold off at least a year and likely longer. Even alternative lenders require a waiting period before they will consider making a loan. SmartBiz, for example, requires a three-year waiting period while Funding Circle mandates seven. Some, like OnDeck and DealStruck, are more lenient. They only need a two-year waiting period.

FAQs About Bankruptcies and Loans

The above points will help you create a strategy to get a loan after bankruptcy and improve your credit scores. The answers to the following frequently asked questions provide additional information about the impact of bankruptcy on business loans:

Can you get new business loans while still in Chapter 13?

Getting a business loan while in Chapter 13 bankruptcy will be tough, but not impossible. The Bankruptcy Code allows you to incur certain types of new debt, but you will need to get the court’s permission and be current on your plan payments.

What happens to my existing business loan if I file a Chapter 7 or Chapter 13?

Filing Chapter 7 bankruptcy discharges any personal liability for the business loan but not the debt itself. The reason is, unless you are a sole proprietor, the business is a separate legal entity and remains responsible for replaying the obligation.

A small business set up as an LLC or corporation cannot file Chapter 13 because it is for personal use only. Sole proprietors can file Chapter 13, however, and reorganize and pay back both their personal and business debts, including loans.

Can I discharge an SBA loan in bankruptcy?

Many people mistakenly believe that because the SBA is a federal agency, loans are not dischargeable in bankruptcy. The truth is, you can discharge an SBA loan. There is a catch, however. If you pledged any assets as collateral, bankruptcy would not remove the lien, and the lender can foreclose on or repossess that property.

Wrap Up

Although bankruptcy will drop your credit score dramatically and stay on your credit file for 7-10 years, you can still qualify for a business loan. And because you could have less debt and cannot declare bankruptcy again right away, some lenders may consider you less of a risk.

Take steps now to improve your personal and business credit so you can demonstrate that you are a better credit manager. Even though some lenders don’t require your bankruptcy to be fully discharged, the longer it has been since you filed and the lower you have kept your debt, the better.

If you are a business owner who is considering filing bankruptcy, speak with a bankruptcy attorney. He or she can explain the laws clearly and show you the best options for protecting your business interests.

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10+ Types of SBA Loans Compared for Your Business

10+ Types of SBA Loans Compared for Your Business


Small Business Administration loans are a lot like “regular” bank loans with comparable rates and fees. So why get one?

The SBA loan usually requires a smaller down payment. Since the loan is guaranteed by the SBA, the financial institution will more readily award the loan. The payback term for a working capital loan can be up to 10 years. If you’re purchasing real estate, the term can be up to 25 years. Interest rates are reasonable. Longer terms translate into smaller payments. You can write off money paid on interest.

And of course, you’ve heard that time is money. That’s particularly true with your SBA loan application. Don’t have a lot of money in the equity of your small business? The SBA may look at the amount of time you’ve invested in your business, and consider your time to be equity.

Small business owners would be wise to get with the program. By the end of August 2019, the most common SBA loan program for small business owners (the three options in the SBA 7 (a) loan program, see below) had doled out $20.9 billion. The CAPLine financing program had loaned $255 million (for exporters, see below).

Want some of that loan money? Here’s what you need to know about the loans.



What is an SBA Loan?

It’s a common misconception the loan comes directly from the SBA. Not true. The loan comes from a bank that participates in the SBA loan program. A participating bank will often have specific loan officers who work with the program.

SBA loans are loans made to small businesses and guaranteed by the SBA. An SBA loan is issued by a participating lender approved by the U.S. Small Business Administration — and not by the SBA itself. So if you want to apply for an SBA loan, you have to find an SBA-approved lender.

Remember the SBA wants to help business owners. In fact, the SBA is dedicated to helping small business owners grow and improve their operations – and their bottom lines.

The SBA guarantees a percentage of the loans for the bank. That gives the lenders an important reason to favorably consider a loan application. It is because of this guarantee that SBA participating banks are more apt to loan money. You can get a loan even if you don’t fit the standard criteria for a loan.

Many banks, from large chains to neighborhood banks, are SBA-approved lenders. You can find out if your bank participates in the SBA loan program via a search on the SBA website.

Go to www.sba.gov. Search for approved lenders. You’ll also find a handy loan application checklist so you’ll be prepared when you sit down with lenders and ask for financing.

What are the Different Types of SBA Loans?

Before you begin the application process, find out about the various loan types that the SBA offers. There are many options. Among them, you should find one that is the best fit for your company. Research the various programs and determine which one fits your needs.

You can get a lump sum loan or a line of credit. The most popular types are the SBA 7 (a) loans. There are 3: the standard 7 (a) loans, the 7 (a) small loan, and the SBA express loan. The 7 (a) loan offerings are lump-sum loans. The SBA Express is a line of credit. A CAPLines loan is a line of credit, and one of the two most popular loans. The line of credit loan is used by small businesses that are seasonal, such as a contractor business or builder business.

However, the SBA has a number of programs. The full list of SBA loan types is:

Types of SBA Loans

Standard 7(a) Loan

Standard 7 (a) Loan has no minimum amount and can provide a maximum loan amount of $5 million. A business owner can use it for a variety of purchases, such as equipment upgrades. If you’re borrowing less than $25,000 for your business, you won’t need to provide collateral.

When the loan is higher than $25,000, the lenders require an amount of collateral by percentage comparable to the loan amount. If the loan is higher than $350,000, lenders must collateralize the amount.

In addition to your business financial records, you’ll be asked to complete paperwork specific to the SBA loan program. It’s worth it. Since the lenders know the loan is backed up to 85% by the SBA, there’s built-in security to providing the loan.

7(a) Small Loan

As it sounds, the SBA 7 (a) loan has a smaller maximum loan amount. The maximum in this 7 (a) loan program is $350,000. For loans up to $150,000 the SBA guarantees the loan up to 85%. For more than $150,000 the SBA guarantees the loan up to 75%.

The collateral requirements are the same as they are with the SBA Standard 7 (a) loans. Business owners report a slower application process but better repayment terms

SBA Express

Need a loan in a day and a half? The SBA Export Express is a line of credit up to a $350,000 loan. Small business owners can get the loan in 36 hours.

The SBA guarantee amount is lower at 50%. The loan is a revolving line of credit which most commonly must be repaid in 7 years. Borrowers may be able to get an extension.

Export Express

Of all types of SBA loans, this one is the fastest with a turn around within 24 hours. Small businesses specifically dealing with exports can get up to $500,000.

The money can be used for a variety of purchases, such as equipment, real estate and inventory.

Export Working Capital

This SBA loan is tailored for small businesses that need funds specifically related to exporting. The loan program will provide up to $5 million of working capital. The repayment terms are strict, payback in one year or less.

International Trade

The SBA International Trade Loan is a term loan specifically for financing assets and working capital for export business. The financing for this loan program is provided by GBC International Bank. The SBA guarantees the loan for 90% up to $5 million.

Veterans Advantage

This SBA offering is basically a 7 (a) loan for Veterans and Veterans’ families. The business must be at least 51% owned by a Veteran, which includes active service members, spouses, widows and widowers of Veterans, active reservists and members of the National Guard.

The terms of fees and rates change annually in response to the health of the business climate. For example, in 2018, under the program, a borrower could get from $700,000 to $5 million, with a 3.5% guarantee fee. In the same year, for a loan up to $125,000, the SBA guarantee was 85% with no fees.

CAPLines

SBA CapLines loans are lines of credit. These types of loans are mainly used by a business that needs some working capital for a specific time of year.

The SBA has four kinds of CAPLiines loans: Seasonal, Contract, Builders and Working Capital.

The Seasonal loan is primarily used by a business that needs to bolster accounts receivable and inventory during a specific time of the year. An example could be a small ski lodge which needs to upgrade rental equipment and pay for snowmaking before the ski season begins.

The Contract loan, just as it sounds, is a loan typically used by a business that has been awarded a contract, but will need to pay for labor and material during the life of the contract. The business needs some funds to pay employees and buy materials until the business is paid. A Contract CAPLines loan could be used by a road paving company, which has been awarded a contract by a town or county. The road paving company won’t be paid for the work until it is completed, and needs a loan.

The Builders loan is another one that is aptly named. The loan is tailored for the independent general contractor or builder who needs to pay employees and buy material upfront. Think of a house builder who needs to buy drywall and pay drywall finishers as part of a house project.

The Working Capital loan is tied to the assets of the business. The business needs a loan until assets are converted into cash. The business repays the loan by selling those assets. An example could be an artisan who creates a product, such as paintings or artwork.

SBA Microloans

Microloans are very small loans from $500 to $50,000. An SBA microloan is obtained through an intermediary organization approved by the SBA, often called microlenders.

Who are these microlenders? Under this SBA loan program, the microlender can be an individual or private entity. The individual or entity receives the repayment of the loan principal plus interest.

The SBA microloans are structured and were created to assist a small business that is owned by women, veterans or minorities.

In one facet of the loan program, the SBA provides loans and grants directly to eligible non-profit microlenders. The non-profit microlender then provides SBA loans to a business that needs funds for start-up costs, training of employees or technical assistance.

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504 Loan

The 504 Loan was also known as the Certified Development Company program loans. The loans are for financing the purchase of fixed assets. Fixed assets include real estate, buildings and machinery. The maximum loan amount is $5 million.

The Small Business Administration and lenders cooperate to keep the borrower’s costs as low as possible. The buyer needs a 10% down payment. The SBA kicks in 40% and the lender provides 50%.

As has been said, it takes money to earn money. In order to qualify for a 504 loan, the applicant must have a net worth of $15 million.

A business may qualify for a second 504 loan for manufacturing projects, especially energy-efficient projects.

Special SBA Loans

In addition to regular SBA loans outlined above, the SBA also has other types of loan programs for unique situations. These include Disaster Loans, Economic Injury Disaster Loan.

As the COVID-19 pandemic continues to unfold, a business looking for financing might opt for one of the SBA disaster loans. The loan amount is up to $25,000 and is designed to have quick turnarounds. A disaster loan is a solution to financing problems while you’re waiting to get a separate loan.

For more information, check out:

SBA Loan Type Comparison

Loan Type Maximum Amount Description Qualification
SBA 7(a) Loan $5 million Standard, for business purchases Standard plus SBA forms
7(a) Small Loan $350,000 Like the Standard, lesser amount Standard plus SBA forms
SBA Express $350,000 For a business in 36 hours Standard plus SBA forms
Export Express $500,000 For exporters need in 24 hours In business for 12 months
Export Working Capital $5 Million For exporters, one-year term Guarantee from owners
International Trade $5 million For fixed assets, working capital Prove to create markets
Veterans Advantage $5 million The 7 (a) loan for Veterans Biz 51% owned by Veterans
CAPLines $5 million Short term lines of credit Signed contracts, assets
SBA Microloans $50,000 For Women, Veterans, Minorities Vets, women, minorities
504 Loan $5 million Financing purchase of fixed assets including include real estate, buildings and machinery $15 million net worth

Pros and Cons of SBA Loans

There are many types of SBA loans and that in itself lands on the Pro side. As a business owner, you’ve got a menu of choices for types of loans, the loan amount and lenders to approach.

Although the Small Business Administration actively promotes and supports its business loan program, some in the business world have a negative opinion about the SBA loans program. They say the path to financing is clogged with too many hoops.

Is that con unjust? Let’s take a look at the pros and cons of SBA loans.

Advantages

The SBA 7 (a) loan program is the most common SBA financing tool. Since the SBA backs the SBA 7 (a) loans, lenders may more favorably consider financing the business application. The SBA 7 (a) loans have 3 forms, based on the amount sought from lenders and how fast the business wants to get the money.

Exporters have similar choices in types of loans and the speed in getting the money. With the CAPLines loans, the lenders provide a line of credit for a type of business that has peak times of operation. A business with a peak time could be a seasonal business or a business that depends on contract work.

On the plus side, lenders which participate in the SBA loans program are familiar with all the steps in the process. It’s the lender who collects information about your credit and makes sure your application package is complete before sending it to the SBA.

Disadvantages

There are two complaints about SBA loans: a large amount of paperwork and interest rates.

Yes, more paperwork is required for SBA loans. The SBA paperwork is in addition to the standard information about the business, such as income and expenses, existing credit obligations and assets, such as real estate.

Interest rates for a line of credit loans such as the CAPLines loans range from 6.75 to 9.25%. Those loans also include a one-time guarantee fee which can range from 2 to 3.75%.

The lump-sum loans interest rates are tied to the prime interest rates, which in March 2020 was 4.75%. In the SBA loans program, the lump sum loan interest rate is a fixed rate based on the amount borrowed, plus prime.

As of March 2020, the interest rate for SBA loans was 8% for up to $25,000, or 12.75% in total. For $25,001 to $50,000, the SBA loans interest rate was 7%. For $50,001 to $250,000, the SBA loans interest rate was 6%. More than $250,001, the interest rate of SBA loans was 5%.

If you feel those interest rates are high, you may not have tried for a personal loan lately. In 2019, the interest rate for personal loans ranged from 12 % to 36%. To get the lowest rates, the applicant needed a credit score of 750.

Of course, interest rates for loans vary. For up-to-date checks of the SBA interest rates for loans, go to www.ssbalenders.com.

Are SBA Loans Hard to Get?

SBA loans can be hard to get because of a major Catch-22. In order to get an SBA loan, you must have tried for another type of loan but been refused. You must have the paperwork to be able to prove that happened.

The credit score minimum is currently 680, which is not set by the SBA. It is a number SBA participating lenders set for prospective loan applicants. If your credit score is lower, don’t bother applying.

The SBA loan program is only for US businesses that have been established for 2 years. The business credit and your credit must be excellent. There can be no history of loan defaults.

You’ll have to fill out additional paperwork beyond a typical loan application. For example, SBA 7 (a) loans include SBA form 1919. SBA form 1919 must be completed by all owners of the business. An owner is defined as anyone with 20% or more interest in the business. SBA form 1919 must also be completed by all officers and directors, managing members, and any person who is hired to manage the operation of the business.

Additional paperwork required for an SBA 7 (a) loan program includes the SBA form 912, which is a statement of personal history. This is basically a resume of a person’s education and work history. If the business is a sole proprietor, the SBA also requires form 413, which is a financial analysis of the proprietor.

For loans associated with an export business, a business applying for the SBA loans program may have to prove ventures. To apply for Export Express or International Trade loans, the business must prove it is expanding into new markets. The Export Working Capital loan requires a personal guarantee from all owners of 20% of the loan amount.

What Does it Take to Qualify for an SBA Loan?

To qualify for any SBA loans, you must have a credit score of at least 680. Although requirements vary by type of loan, you may need to put up collateral.

You’ll need to complete lots of paperwork. But you already have the nuts and bolts. For starters, you’ll need the same basic documentation, such as proof of income or business profit, and a list of assets.

The center of the paperwork for SBA 7 (a) loans is that SBA form 1919. For any of the SBA loans, you can get a head start by going to the SBA website and downloading the forms you need. The 7 (a) loans are the most common.

If you put in the time to qualify for an SBA loan, you’ll get a “timely” reward. Payback terms can range from 10 to 25 years.

Where to Get an SBA Loan

To get an SBA loan, you must start with an SBA approved lender. Check with your current bank, as it may already be approved for SBA Loans. You can find a list of approved lenders at https://www.sba.gov/lendermatch].

You can find a list of private investors willing to lend microloans by checking at https://www.sba.gov/partners/lenders/microloan-program/list-lenders].

Let’s review the process, step by step:

  1. Determine your eligibility by setting up a meeting with a bank loan officer.
  2. Organize all your paperwork. The main documents you’ll need are business financials, projected financials, a business profile, tax returns, your loan application history, and information about leases (if it applies).
  3. Draft a cover letter. The cover letter should explain the company identity and what it does. It should also include the background of the owner or owners.
  4. Fill out the SBA forms. A checklist of required forms for each type of loan is on the SBA website. The basics are Form 4 (the application); exhibit A, the schedule of collateral; Form 912, the statement of personal history; Form 413, your personal financial statement; and Form 159, the fee disclosure and compensation agreement. Those are the basic forms of all the loans. There may be additional paperwork specific to the type of loan.
  5. You’ll hear from the bank once the lender determines you pre-qualify.
  6. If you pre-qualify, you’ll get a proposal from the bank.
  7. If you accept the proposal, your loan will move to the underwriting stage. During this stage, the go through your information. You should hear in 2 weeks if they approve or decline the loan.
  8. Closing – the lender finalizes the terms of the loan and you sign the documents.

Try an SBA Loan

After going through the process, you will either agree or disagree with the following statement. “Applying for an SBA loan is time-consuming and complex.” But you will disagree with that statement if you are well prepared.

At your initial meeting with a loan officer, be clear about exactly what you are seeking in a loan. Then save yourself time and money by getting organized.

Are you ready to embark on the SBA loan program? There’s no time like the present, and you’ll never know until you try.

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Small Business Loan Requirements – and How to Meet Them

Small Business Loan Requirements – and How to Meet Them


Reeling from these tough economic times, you may be considering a loan for your business for the first time.

How do you get a small business loan? Should you apply to an online lender? Try to get a loan through a bank? Go through the Small Business Administration (SBA) for financing?

Many loan requirements are the same for the application process. Lenders and the SBA have specific conditions you must meet in order to get a loan. But with some loans and lenders, there is a protection program to ensure that you are safe.

An SBA loan may have special requirements that differ from the requirements of traditional loans. Every lender uses certain evaluations to determine your ability to repay.

Lenders look at bank statements, assets in the business, financial statements, debt service coverage ratio, and personal and business credit score (present and history). Lenders also want you to have a sound business plan.



Get Your Ducks in a Row

Did you ever change the business name, physical address, or phone number? Are these changes on past bank statements, tax forms, incorporation papers, utility bills, and websites?

In other words, Joanie’s Pet Sitting is not the same as Joanie’s Pet Sitting LLC. Joanie’s Pet Sitting, Virginia Beach is not the same as Joanie’s Pet Sitting, Norfolk.

If a business name, address, or phone number changes, the change should be made on every license and document related to the business. You can’t rewrite former financial records. But you can include documentation that supports the business history. You can include a letter of explanation as well.

The main concern of a lender is to determine your ability to repay the loan. Here’s a look at the key pieces of the loan application puzzle.

Top 8 Small Business Loan Requirements

Here are the top 8 small business loan requirements and how to qualify for a loan:

Personal Credit Score

Your personal credit score carries a lot of weight in the business loan application process. For many types of business loans, when you as the owner of the business sign on the dotted line, you are guaranteeing payment of the loan.

This is especially true with fledgling small businesses that are still building a history of tax returns. Don’t worry if your business is relatively new. You may still get a loan if you have an excellent personal credit score and all the business owners have good credit scores. If your business has multiple owners, the lender may want to see a credit score from each. The loan amount will be closely tied to those scores.

Some lenders may require the business to be operational for a minimum of 2 years. If the business has 2 or more years behind it, lenders may look at a business credit score. That score comes from a business credit bureau, such as Dun & Bradstreet.

Action to take: Before applying, business owners should check their personal credit score to make sure all the information is correct. Get credit scores from each owner. Clear up any inaccuracies. Some credit report monitoring services have suggestions for improving your score, and you may be able to bump your score up a bit if you have time. In borderline cases, it could be enough to net you a better interest rate or other terms.

Work to improve your credit score. Schedule payments to make sure you make them on time, reduce your debt, open a business credit card and keep you utilization of available credit low.

Bank Statements and Ratings

What do lenders look for when they examine your bank records? Lenders look at seasonal fluctuations in income, debt to income ratio (see below), and tax obligations.

When you’re borrowing from a bank, the bank will assign a rating. The rating is the total amount of borrowing capacity you have from that bank.

The date you opened a business bank account is used as the start date for your business. The longer your business has been established, the more likely you are to qualify for a loan.

There are contributing factors to favorable bank ratings. Ideally, your average daily balance should be above $10,000 for 3 months. Manage your bank accounts to keep the average daily balance as high as possible. Avoid overdrawing your account, and set up overdraft protection.

It’s not enough to just have the money sitting there. Your business should be generating a steady volume of regular deposits.

You also should have a bank reference, who is the person you work with at the bank. In other words, a person who will vouch for you as bank officials consider your loan.

Revenue/Balance Sheet

Of course, revenue is important. A business must make money to stay afloat, and pay the requested loan.

But revenue is just one of the important numbers that help businesses get loans. Revenue is part of a balance sheet.

The balance sheet includes assets, liability and owner equity. The assets of businesses are subtracted from the liabilities of businesses. The calculated amount of owner equity is added to that number. That number is an estimate of what the business is worth. That number must be reasonable in comparison to the loan amount sought.

Action to take: Chip away at the amount of liability every chance you get. It’s a lot like paying off a credit card. Just paying interest keeps you treading water. Applying even a small amount of money monthly to principal debt will show a positive change and attention to the health of the business.

Debt-to-Income Ratio / Cash Flow

Think of the balance sheet as a snapshot of your business. The debt-to-income ratio, or cash flow, is a monthly snapshot.

Each month, after expenses are paid, how much money is left? This number shows the lender how much of a loan payment you may be able to handle monthly.

Lenders may also do a comparison of accounts receivable to accounts payable. You won’t be able to “pick your best month” as an example. The lender will do that comparison the month you are asking for a business loan.

What’s the number that a lender wants to see for a debt service coverage ratio? A lender typically wants to arrive at a calculation that is less than 1.25 or 1.35 times your expenses. That calculation of expenses will include the payments you’d be making on the loan you are seeking.

How does the lender get to that debt service coverage ratio number? Typically, the lender divides the annual net operating income by the total principal and interest of all debt obligations.

Here are the highlights of what a lender will analyze: gross margin, cash flow, debt to equity ratio, accounts payable, accounts receivable and earnings (before interest, taxes, depreciation and amortization).

Lenders prefer to see financial statements that have been audited by a certified public accountant. You can have financials reviewed by a CPA – which is faster and cheaper – but some lenders require audited financials. Find out what the lender requires.

Action to take: Accounts receivable will only include goods or services that have already been invoiced. Make sure you are invoicing promptly. And of course, make sure you are paying your bills promptly. Proving that you are up to date with sending out bills and paying bills shows the lender that you have a good process in place for money management.

2+ Years in Business

For a Small Business Administration lump-sum loan, your business has to have been running for 2 years. There are SBA loans that don’t have that requirement, such as many of the line-of-credit loans and the SBA microloans.

To get a business loan from the SBA, you’ll need to present tax returns for the past two years that prove the existence of the business.

Action to take: Organize your tax returns. Put them on a disc or into another format that is easy to provide to a lender. Provide a business credit report. Provide the applicant’s credit report and get copies of the credit scores of all owners.

Type of Industry

To get an SBA loan, businesses must meet the requirements according to the SBA’s definitions of small business. Those definitions vary by type of industry.

The SBA definition of small business is two-part: by the number of employees or by the average annual receipts (gross income).

The gross income is averaged over 3 to 5 years. If the business hasn’t been around for more than a year, the gross income is calculated by the average weekly income times 52.

The number of employees is calculated as the average number of employees per pay period. This includes part-time employees. The average is calculated using a 12-month period.

For a look at the SBA requirements under the type of industry, go to www.sba.gov/document/support–table-size-standards. It’s an interesting read and may make you realize just how big or small some small businesses are.

For example, a cheese manufacturer can have up to 1,250 employees, and be considered, well, small cheese. A flower or nursery stock wholesaler may have no more than 100 employees.

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Businesses can make a lot of money and still be considered small. For example, a home health company can have yearly revenue of up to $16.5 million. A baked goods store can make up to $8 million.

Action to take: If you think your business is too big for a small business loan, think again. Check the Type of Industry chart to learn the requirements. You may be pleasantly surprised to find out you can apply for a small business loan. Get familiar with the numbers for employees by the type of business. Since part-timers are also counted, you might be getting close to going over the requirements. To qualify for an SBA loan – with better rates and longer payback terms – you may consider combining part-time positions to full time.

Collateral or Assets

Not all lenders require that you put up collateral to get a loan for business use. But for those lenders that do, you may have to list assets on your loan application.

Lenders like to see assets that they can easily use (seize) if needed to cover your loan obligation if you fail to repay.

Assets include business real estate, inventory and business equipment. It’s important to know that collateral can also include funds from accounts receivable. That can include monies that have been invoiced but haven’t yet been paid to the business.

If you can’t pay the loan, the lender can seize the assets. For real estate and equipment loans, a UCC (Uniform Commercial Code) statement may be filed to claim accounts receivable and other collateral.

If you don’t have sufficient assets, a lender may require personal guarantees. This is not a good option. This type of loan backing puts your personal assets at risk as well as the assets of the company.

Action to take: Yikes! Imagining a future where you lose business real estate and inventory may give you pause as you list those items on your loan application. Scary stuff. But it’s a given that those who are confident enough to start and operate a business have already demonstrated determination and boldness. Taking out a business loan is a risk, but growth doesn’t come without risk.

Business Plan

Lenders don’t often ask to see a business plan from those seeking loans for businesses. But adding information about the plan to your application may make your business stand out from others looking for a loan.

It’s like adding a brilliant cover letter to your resume. Of course, the application information includes bank statements, information about the owner’s (or owners’) credit score.

You may also include information about the nuts and bolts of your company. Let the lender know what you do and how you make money.

Also, include information about how the loan fits into your plans for the business. Let the lender know how you place the spend the proceeds of the loan. Provide realistic financial projections for future growth

If applicable, include market information and details on the status of your business niche. Describe how demand for your products and services is growing. Make projections to predict future growth.

Action to take: As you prepare to apply for the business loan, gather the paperwork needed to document your business plan. Include bank statements, information about personal credit/credit score and business expenses. These are the black and white proof of your ability on paper to pay the loan.

Add the missing piece to make your application for a business loan stand out from others. The average person on a lender review team may have no knowledge of what your business is.

For example, let’s use a business that makes something called a Skid Plate. Piece of metal that goes under a car, huh? Would a lender want to grant a business loan for a company expansion? What if the lender knew that the Skid Plate was a patented new product, in huge demand in the race car industry, primarily NASCAR?

By adding an explanatory description of the business, you will be more likely to get a business loan.

FAQs About Qualifying for a Loan

Let’s review some quick facts about the application process for business loans.

Who Can Apply for a Small Business Loan?

Any small business can apply for a loan. You should be making a profit and have a good credit score. You should not be involved in any default action by any entity, including the US government. People in the loan business don’t like that kind of stuff.

If the business owner is going for a loan through the SBA, the requirements are different. The SBA requires that your business operates within the United States and has been operating for a minimum of 2 years. If you can’t meet those qualifications, don’t bother going through the application process.

Are Small Business Loans Hard to Get?

The business loans are not hard to get if the company has owners with good personal credit and has been making money.

If you or any of the company owners (20% ownership or more) have a bad credit score, you have little chance of getting loans through the SBA. The SBA won’t give loans to a businesses which aren’t making money. A startup entity may try for a microloan.

You may find although you were stressed out about how to land a business loan, the process was easy. If you’re already running a company, you’re good with paperwork. Or you’ve hired somebody who’s good with paperwork!

One of the main requirements for getting loans is being organized. Get your paperwork stuff together and go for it. Today you have more options than ever for getting business loans.

For more information see the Small Business Credit Survey1.

What Documentation Must I Provide?

Lenders require documentation for business loans and it varies by the type of loan. At a minimum, you will need to provide income tax returns, your credit score, bank account information, a business financial statement, and personal identification such as a driver’s license. For more information about loan paperwork, go to Business Loan Documents to Provide.

What is the Minimum Credit Score for a Small Business Loan?

Most lenders require a minimum credit score of 600-680 for a small business loan. That’s a minimum requirement for business loans from most lenders.

People who get a business loan from an online lender may be able to get around that qualification. Online lenders considering loans often value business revenue more highly. Do some shopping, as the loan amount is typically smaller with varying interest rates.

How Much Can I Borrow on a Business Loan?

The amount of money lenders award is directly connected to how much you can afford. It won’t be how much you think you can afford. It will be how much the lender determines you can afford.

That’s a good thing. A reputable lender has your back and doesn’t want you to fail.

Summing Up

It’s no shame to need a loan for your business. In fact, obtaining a loan for future expansions or growth is a standard part of nearly every business plan.

Getting a loan to expand the business is not a one time venture in a business plan. Often business owners take out and pay off a series of loans during the course of doing business. You can use the loans to finance purchases, such as real estate, equipment or fleet vehicles.

Business owners historically have borrowed about $600 billion each year, according to a study by the SBA. Typically about 40% of small company owners borrow money each year. And that doesn’t mean that business owners are landing huge loans.

The average size of a business loan, since 2016, has been about $600,000. But many of those applying for a loan borrow much less. More than half of the business applied for loans of less than $100,000.

It’s important to understand what lenders are reviewing when you apply for a loan. Understanding what’s important to get a loan will help you improve your chances, now and in the future.

Although additional paperwork is required for an SBA loan, you may be pleased to find that it is easier to qualify for one of their options. In fact, business owners often get SBA loans after being turned down for a traditional loan.

Yes, it can take some time to complete the application and get the loan. On the plus side, terms range from five to twenty-five years for paying off the loan. Loan interest rates are priced according to risk, which is also standard practice with conventional commercial loans.

No matter what type of business you have, it stands to reason that someday you’ll need a loan for improvements and growth. Take steps now that will help you qualify for a small business loan.

Information Sources

1 Fed Small Business. “Small Business Credit Survey

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What credit score do I need for a business loan?

What credit score do I need for a business loan?


When it comes to qualifying for a business loan, your credit rating is one of the most important factors that lenders consider. Below we answer some frequently asked questions (FAQ) about your creditworthiness for a business loan. <! – ->

What is considered a good credit score?

A good personal score for a business loan is 720 and more. A good business credit score is 80 or higher.

Note that different credit bureaus may have different rating systems. Each lender chooses its own standards. So there may be deviations in the evaluation levels. However, the Federal Reserve's 2020 Small Business Credit Survey (p. 12) sets the general rule for the small business credit industry:

  • Low credit risk: 80-100 business credit score or 720+ personal credit score.
  • Medium credit risk: 50–79 business credit score or 620–719 personal credit score.
  • High credit risk: 1-49 business credit rating or less than 620 personal credit rating.

<! – -> Borrowers with low credit risk receive the largest selection of credit products and the best conditions. High-risk borrowers have few options and pay the most. Getting even a small business loan could be difficult for high-risk borrowers.

Is there a minimum credit value for a business loan?

Technically, there is no minimum credit rating for a small business loan. Every lender has its own requirements.

However, there are some general rules of thumb in the industry. In practice, a personal score of 620 is generally accepted as the minimum. You will most likely need a score of 720 or higher for good business loan terms.

Can I get a business loan with a credit score of 600?

Entrepreneurs often want to know: Can I get a business credit with 600 credit points? Or with another number like a credit score of 500?

The answer is: It will be difficult to get a business loan with a score of 600 or less. <! – ->

What can you do? If your need for money is not urgent, try to improve your creditworthiness so that you can get out of the high-risk category. This is the best long-term option. If you need money right away, check out one of the loans below that don't require a credit check. See also: Loans for small businesses with bad credit .

Business or Personal Score – What's Most Important?

To get a loan for a business, most lenders check both your personal and business credit scores. But good personal credit is the key.

<! – -> Remember, a personal credit score and a business credit score are completely different things. They use different rating systems. The credit bureaus are also different. Some like Experian report both types of ratings. Dun & Bradstreet are only business credit reports. A FICO score is a personal score.

Depending on the type of funding you are applying for, most lenders may want to review both of the results of your loan application.

You may be wondering why the lender needs to check the personal credit scores for a business loan ?

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This is due to the fact that "the personal finances of owners are still closely linked to the finances of their businesses," according to the Small Business Credit Survey 2020. Professor Scott Shane adds that personal loans are one Business credit concerns because so many small businesses are sole proprietors. Therefore he says: "The business debt does not legally differ from that of the owner." He also notes that more than half (56%) of small business loans nationwide will require a personal guarantee from the owner for the same reason.

Conclusion: Most lenders want to see both your personal credit report and your business credit report. However, personal credit scores remain the key.

What happens if my credit score is low?

If your credit rating is low, your overall small business loan application may be denied. However, denial of credit is only one of the adverse consequences – there are others.

According to a study by Fundera, the benefits of good business credit can be measured in dollars and cents. Bad creditworthiness often leads to the following:

  • Smaller loan amounts. A good credit score can mean that you get approval for up to 20 times more credit than if you had a bad score!
  • Higher interest rates and fees.
  • Shorter repayment period, in turn requires higher payments and depresses cash flow. According to Fundera, entrepreneurs with good credit ratings had an average of 16 years to repay their loans. People with bad credit only got 8 months.

To compare how interest rates and other terms work, run scenarios on the business loan calculator .

Do I need a business credit score at all?

A business credit score is not always required to obtain a small business loan.

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Small business lenders are pragmatic. A commercial bank can see that a startup with very few years of business does not have an established corporate credit history. Sole proprietors may not have an established corporate credit history, as the company is operated primarily on behalf of the owner. In these cases, lenders rely heavily on the owner's personal score.

However, if you have a corporate credit history / rating, increase your options.

Do Lenders Count the Creditworthiness of Partial Owners?

Yes, lenders typically count the personal credit scores of partial owners who own at least 20% of the business. This includes business partners in a partnership or anyone in a company or LLC that has at least 20% equity. Originally a Small Business Administration's standard requirement for SBA loans, the 20% rule has now become part of the traditional underwriting standards. If more than one partial owner has low scores, this could be particularly problematic.

Can I get a business loan without a credit check?

Yes, it is possible to get a business loan without a credit check. However, you are limited to some funding options, such as: B. Invoice financing, factoring, cash advances and certain microcredit. Crowdfunding and personal loans from friends and family are also possible.

Make sure you understand the advantages and disadvantages of options without a credit check:

  • Positive – some types of funding, such as cash advances, can be very quick. You get money within hours or a day or two.
  • Negative – Loans without a credit check can be expensive with high fees. Interest rates and APR are higher than traditional loans. You lose control of cash advances. Example: Payments can be automatically debited from your bank account at unfavorable times, which has financial consequences such as checks.

What are examples of loans that do not require a credit check?

An example of a loan without a credit check is PayPal Working Capital. Small businesses that use a PayPal business account to process annual payments of at least $ 15,000 can apply for working capital loans. Right on his PayPal website states :

No credit check. Your loan is based on your PayPal sales, so no credit check is required and does not affect your credit rating.

Square Capital is another popular example that does not require a credit check. Square Capital is open to companies using the Square payment processing device. It works so that Square knows your history of payments received and can estimate how much you will receive in the future. Your loan amount is based on your volume. The repayment is automatically deducted from future sales, according to the Square website.

A third example of an option without a credit check is stripe capital for companies that use the stripe online payment system.

There are many others. Look for online lenders that provide cash advances without a credit check.

Should I use personal loans for business purposes?

No, not in the long run. Instead of business loans, some small business owners turn to consumer loans such as home loans and personal credit cards. Obtaining consumer credit is often easier if your company lacks an established credit history. However, relying solely on personal sources of credit is not a good long-term strategy. Here's why.

If you rely solely on personal credit cards or consumer credit in business situations, you may be at full capacity at worst. This is because your company and family have to share a single credit limit. Let's look at an example of how this limits you.

  • Suppose you have a personal credit card and a home line with a combined credit limit of $ 50,000. They decide to use all available credit to finance the business expansion. The problem is that you have left nothing for personal purposes. If your truck breaks down, there is no credit for emergency repair bills. Your credit limit is fully tied up in business.
  • However, suppose you also get a $ 60,000 business loan. That would give you a higher overall credit limit overall. You would have a total of $ 110,000 ($ 50,000 personally + $ 60,000 on business).

See How You Can Expand Your Business With More Total Credit Available – Without Limiting The Funds You Might Need For Family Expenses? For this reason, your long-term plan should be to build up business loans .

Will a lender ignore bad credit if I offer personal collateral?

No. Some small business owners wrongly assume that their creditworthiness does not matter if they offer personal security such as a motorcycle or a motor home. It is important to remember that a traditional lender does not want real estate. The lender is active in the lending business. The lender wants you to repay the money.

In my banking days, we saw it as a last resort to recapture assets. This is because there are many costs associated with taking back vehicles or collecting other assets such as equipment. Then the lender has to turn around and find a buyer for the assets. In the meantime, the collateral loses value. Months or years later, the lender can get back just a few cents on the dollar from collateral liquidation – and still have an unpaid shortage.

Therefore, most lenders inquire with the credit bureaus. They want to make sure that the borrowers can pay their debts well. But don't be confused. Yes, a lender can likely request a personal guarantee and business collateral, such as a UCC claim, as a lever for repayment. But the lender only comes to this point after first performing a credit check.

What if you have personal assets but have bad credit? You could:

  • Sell the items. Place an ad on Craigslist, local classifieds, or specialty ads like ATVTrader.com.
  • Pawn the items in a local pawnshop. No credit check is required.
  • Checking financial companies for loans. Warning: Financial companies charge high fees and offer short-term loans in amounts below $ 20,000. There are some decent financial companies, but there are also bad ones. The Federal Trade Commission strongly advises against predatory financing such as car loans.

As you can see from these FAQs, your personal and business credit rating makes a significant difference. Whether for an SBA loan, equipment finance, or other business loan, credit scores are important.

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