Credit scores can be confusing! But if you’re interested in an SBA loan, it’s worth your time to learn about this important metric and how it may impact your loan application.
SBA loans are government-guaranteed small business loans typically made available to eligible U.S. entrepreneurs through banks and other financial institutions. These loans have long terms and low rates that lead to very low monthly payments.
There are lots of ways you can use SBA loan proceeds to save money and grow your business. Working capital and debt refinance are two popular uses of funds. Business owners use SBA proceeds for things like hiring, marketing programs, equipment, inventory, and more.
If your business is in solid financial health, has been operational for more than two years, you’re likely a good candidate for an SBA loan. Another important factor is having a strong credit history. Learn more about credit scores below.
A FICO personal credit score is a personal credit scoring system created by the Fair Isaac Corporation. It’s presented as a 3-digit number derived from detailed information about your credit history. Your personal score can affect things like car loans, mortgages, and your ability to qualify for a business loan.
In short, your personal credit score is a reflection of how well you handle your personal finances so comes into play with SBA loan requirements. These 3 numbers show your financial habits and help lenders assess risk. Banks and other lenders want borrowers who can make payments in full for the life of the loan. A credit score can be an indicator of a good borrower.
Here’s a quiz to check your smarts about this important metric.
If I have a strong business credit score, my personal credit score won’t matter when seeking a small business loan.
Answer: False
As a business owner, you might not think personal scores are important. Think again. If you’re seeking a small business loan, your personal credit score will be one important number considered and may impact the cost of that loan. In general, the higher the credit score, the lower the loan cost.
Your personal credit score shows lenders your annual income and marital status.
Answer: False
Your personal credit report includes a healthy amount of information but the following does not appear:
Personal credit reports simply reveal a number.
Answer: False
Consumer credit reporting agency Experian outlines the information included in personal credit reports.
Your personal credit report helps lenders determine your personal annual income.
Answer: False
Your personal annual income does not come into play with your personal credit score. Jim Anderson, a management counselor for SCORE, explains why personal credit scores are so important. “A major consideration for a lender to make a loan is the ‘character’ of the borrower,” Anderson says. “Lenders want to loan money to people who have a positive track record for paying their obligations as agreed.”
Payment history is weighted more than other factors when calculating a personal credit score.
Answer: True
Your personal credit report is calculated by looking at the following:
I can get a free copy of my credit report.
Answer: True
Every consumer is entitled to one free copy of their credit report every 12 months from each of the three nationwide credit reporting bureaus, Equifax, Experian and TransUnion. Be wary of sites outside of these three that offer free credit reports. Many are only free for a short time period then you have to pay. It’s always a good idea to read the fine print when dealing with your finances.
Equifax, Experian and TransUnion will report the exact same personal credit score.
Answer: False
While most of the information collected on consumers by the three credit bureaus is similar, there are differences. For example, one credit bureau may have unique information on a consumer that is not being captured by the other two.
To prequalify for an SBA loan for $30,000 to $350,000 from a SmartBiz bank partner, the business owner’s personal credit score must be above 650. Lenders may also look at debt coverage, debt usage, and business revenue trends. Additional factors considered include:
Typically, businesses approved for an SBA loan from banks that participate in the SmartBiz lending network have $50,000 to $5 million in annual revenues and 1 to 40 employees. Most are profitable and have a positive cash flow. All can provide proof that they are able to make the monthly loan payment.
You’ve probably heard that it’s hard to get an SBA loan and that the process can be time consuming. While that can be true, being organized, choosing a lender with great customer support, and working with your accountant can help lessen the approval time.
Here’s why an SBA loan from a bank in the SmartBiz network can be a good opportunity to strengthen your business and save money:
If you think you’re ready, pre-qualify with SmartBiz here.