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If you have decided to apply for a business loan, you are indeed taking a good step. It will prove profitable for your business by making it possible to take significant steps ahead.
Nowadays, securing a business loan has become competitive, so you must be aware of the barriers you might encounter along the way. Before applying for a business loan, it is necessary to note the factors that may slow down the process or prevent you from being qualified. One of the most critical factors is your credit score.
Why Does My Credit Score Affect My Chances of Securing a Small Business Loan?
When you intend to apply for a small business loan, lenders look at your personal credit history to decide whether or not they will grant you a loan.
Lenders see your credit score as a direct reflection of how capable you are with money and how reliable you are as a borrower. If you cannot manage your finances well, the lender will assume you will not be able to properly manage your business finances.
How Different Lenders Consider Your Credit Score
Fortunately, your credit score is not of equal importance for every type of lender. You do not need to worry if you have low or no credit; many business financing options are still available to help you. The importance of your credit score varies from lender to lender, and even within different types of financing. High credit score makes it easy to qualify for a loan with lower interest rates and a longer payment term. However, many other factors are also crucial while lenders review your business application, such as the overall financial health of your business, as well as your years in business and profitability.
Let us have a look at different loan options to see how important your credit score for each is:
- SBA Loans: SBA loans are excellent business financing options due to their lower interest rates and extended repayment terms. Due to these terms, it isn't easy to qualify for these loans. Typically, a credit score of at least 680 is required to qualify for this loan.
- Term loans: term loan is the loan that most people often apply for. After qualifying for this loan, you will receive a lump sum of money that you can repay over a fixed period often at a fixed interest rate. A term loan's approval process is usually shorter than that for an SBA loan, but it will have almost similar credit score requirements. A personal credit score of at least 680 is required for it.
- Short-term loans: If you have a poor-to-average credit score, but your business has good regular cash flow, you can qualify for this loan. These lenders give you a loan based on your business revenue. But you should be aware that these loans involve shorter repayment periods and higher interest rates.
How To Improve Your Credit Score
If you have a lower credit score, you can submit a letter of clarification along with your application. Alternatively, you can take steps to establish credit and wait at least six months. Having and using credit products is necessary to build healthy credit.
You can improve your credit score by taking the following steps:
- Open a credit card account only when needed
- Take a credit builder loan from a local credit union
- Make payments on-time
- Keep old accounts open
- Pay off debt and maintaining low balances credit cards
- Avoid applying for too much new credit
By following these steps, you will surely get the best possible loan for your business!