Why Does My Personal Credit Score Matter to a Small-Business Lender?

For most small business owners, your personal credit score will be part of any creditworthiness evaluation

Although your personal credit score probably isn’t the best indicator of your business’s creditworthiness, it will likely be part of every creditworthiness evaluation for most small businesses. Different lenders may assign different weights to the value of your score within a business loan application, but depending on the lender, your score could play a role in whether or not you get approved for a loan, what interest rate you might pay, or the type of business financing that’s available to you.

What are lenders really looking for?

The role your personal credit score plays in your business’s creditworthiness evaluation differs among traditional lenders, online lenders, and other alternative lenders. Although a loan officer might not ask these questions in this way, when a lender evaluates a small-business owner’s creditworthiness, they basically need the answers to the following three very important questions.

1. Can this business repay a loan?

To determine whether or not a business can repay a loan, many lenders ask about your business’s annual revenue, your cash flow, and the predictability of both of those numbers. They want to validate that your business has the financial wherewithal to make each and every periodic payment.

2. Will this business repay a loan?

Your track record reveals a lot about whether or not you will repay a loan—making your track record (both your business credit history and your personal credit history) part of the discussion and part of why many lenders want to see several years in business before they’ll approve your application for business financing. They are making credit decisions about what you’ll likely do in the future based on what you have done in the past.

Even though it may seem counter-intuitive, in addition to your business credit history, your personal credit history is part of the discussion. The lenders are trying to not only understand whether your business can and will make the required periodic payments, but also look at how you meet your personal credit obligations.

3. What will you do if something unexpected happens?

This is probably the most difficult question for a potential lender to answer. The lender wants to confirm that regardless of what happens in the future, you will still be able to meet your payment obligations. If not, they want to mitigate their risk and recoup as much of the value of the loan as possible. That’s why traditional lenders, like banks or credit unions, will often require a detailed business plan that not only shows where your business is today but also makes data-based assumptions about where it’s going and how you expect it to perform in the future.

It’s also why some form of collateral is usually required. Sometimes the collateral could be a specific asset, like a piece of equipment or real estate. But it could also be a general lien that doesn’t identify specific collateral but rather identifies all the business’s assets generally to secure the loan.

Ultimately, whether a traditional lender or an alternative lender is better for you and your business depends on your unique situation.

Personal credit thresholds for small-business loan applications

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As you might expect, traditional lenders have a higher minimum threshold and are more likely to treat personal credit scores as a go-no-go metric. In other words, if your personal credit score falls below a certain threshold, they likely won’t even consider your loan application (this includes loans guaranteed by the SBA).

Many online lenders will approve an application for a small-business loan that might not gain approval at the local bank—provided other business metrics successfully answer the three questions above. But although there are a number of financing options for small-business borrowers with a less-than-perfect personal credit score, those options will likely include higher interest rates.

As a small-business borrower, you should be aware that there is a direct correlation to creditworthiness (or access) and the cost of financing. The weaker your credit profile, the higher the interest rate you will likely pay. You should also be aware that although a strong credit profile might not guarantee the lowest interest rates, you will have more options available to your business, so you can pick the loan that will best meet your business needs.

As a general rule, you should expect to see the following personal credit thresholds when talking to small-business lenders:

  • 680: Most banks and credit unions prefer to work with business borrowers who have a personal credit score over 700, but depending upon the business’s finances, a banker might drop to the 680 threshold.
  • 650: SBA-guaranteed loans will sometimes drop the requirement as low as 650 depending on the borrower.
  • 600: A number of online lenders will approve an otherwise healthy business even if the business owner has a personal credit score as low as 600. But the business should expect to pay a higher interest rate than what they would pay at a traditional lender or for an SBA-guaranteed loan.
  • 500: Some online lenders, merchant cash advance providers, and invoice factoring companies will offer financing to borrowers with personal credit scores as low as 500, but interest rates could potentially be much higher—sometimes as high as double or triple digits.
Don't know your credit score?

If you’re unsure where your personal credit score currently falls with the three credit bureaus (Equifax, Experian, and TransUnion), there are several options available that make it possible for you to review what a potential lender will see regarding your personal credit history:

1. Pull your free once-a-year credit report from each major credit bureau.
2. See your score through sites like Credit Karma or freecreditreport.com.
3. Get your personal credit report from the Federal Trade Commission.

Small-business owners can find more success with strong personal credit

As a business owner, your personal credit score is one of several creditworthiness metrics a potential lender will use to determine whether or not it will approve your small-business loan. In addition to metrics like your annual revenue, cash flow, time in business, business credit profile, and business track record, most creditworthiness discussions will include the business owner’s credit profile regardless of the lender.

Although a strong personal credit profile won’t necessarily guarantee the lowest interest rate, it will open the doors to many opportunities a poor score won’t. And depending on the lender, it will improve your odds for success.

Check out these seven things you can do to build business credit.