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5 Small Business Loans and their Required Credit Scores

Business expansion requires new access to working capital. Unfortunately, not every business owner can sufficiently finance new product lines, workspace, office necessities, and other key assets that keep business operations running. This is where small business loans come in.

A credit score plays a crucial role in any underwriting process. It aids lenders in assessing a borrower’s creditworthiness. There’s no specific credit score rating that’s considered in a certain ballpark, though. Meaning, a company’s eligibility for a small business loan is assessed on a case-by-case basis.

But if a borrower had met or even exceeded a lender’s standard loan requirements (e.g., annual revenue), then he or she should aim for minimum credit scores to be eligible for different types of small business loans. Check them here:

Small Business Administration Loans (Credit Score: 640+)

Many get confused with SBA loans. Just to make things clear first, both the federal agency called Small Business Administration (an organization that supports small businesses) and the loan is referred to as SBA. But, the said agency does not make SBA loans. The banks issue SBA loans, but these loans are partially guaranteed by the said SBA agency.

SBA loans are considered as the best small business loan for small business owners. Why? An SBA loan can offer the following:

  • Highest Capital
  • Lowest Interest Rates
  • Longest Repayment Periods on the market

Specifically, an SBA can offer a capital that can worth millions, single-digit interest rates, and ten-year-long (or so) loan period, depending on the loan program and loan candidate. These three great terms made an SBA loan desirable among small business owners, making the competition fierce. Put simply, it is hard to get an SBA loan.

While SBA doesn’t require a specific credit score since it aims to offer business opportunities to small companies, companies with a 640 credit score or more can potentially be in the running. That is to say, your company should realistically have a robust financial profile to surpass other competitors and successfully obtain an SBA loan.

Term Loans (Credit Score: 700+)

Term loans are almost similar to SBA loans. The former are issued by conventional lending institutions like credit unions and local or commercial banks, too. Also, eligible applicants can enjoy desirable terms like hundreds to millions (for commercial banks) capital, lower interest rates, and longer repayment term.

The main difference is that term loan applications are stricter than SBA loans. If SBA supports small businesses, term loans are more into companies with steady profitability, high annual revenue, longer age of business, as well as a stellar credit score.

Lenders usually take a huge leap of faith when accepting borrowers’ applications, so they usually take their time to assess your creditworthiness. Most of the time, a credit score of 650 is already enough for them, but a score of low 700s will be better.

Equipment Loan (Credit Score: 600+) 

As its name implies, an equipment loan finances computers, machinery, vehicles, or other things you need to run your business. Unlike SBA and term loans, equipment loans have fewer stringer qualifications so you can easily be approved with this kind of loan.

The thing is an equipment loan is collateralized. If you fail to repay your contribution, the lenders will seize your stuff and may resell them to others. On the positive note, the lenders are usually lenient about a borrower’s credit score for an equipment loan. A minimum credit score of 600 can already make you qualified for this work.

Moreover, it’s important to note that the other terms of an equipment loan will depend on the product you’re planning to purchase. A product’s lifespan, industry, or even its universality can have a say on your loan terms. It’s best to communicate with
Commercial Experts about this.

Accounts Receivable (AR) Financing (Credit Score: 600+)

Another type of collateralized loan is invoice or accounts receivable (AR) financing. Basically, it’s a kind of loan that allows you to finance your business’s outstanding invoices through a cash advance by a lender.

Lenders typically don’t mind a borrower’s credit score for an AR financing as heavily as they would for other loan types. It’s the invoice or client/customer’s payment that will be collateralized by the lenders in AR financing, so the onus is on the borrower’s clients or customers.

As the borrower, you only don’t have much access to your loan’s capital compared to other loan types. Generally, the loan terms vary from lender to lender. But, if your creditworthiness is a key aspect for an invoice financing loan, you should have at least a credit score of 600.

Short-Term Loans (Credit Score: 550+)

If you’re looking for faster turnaround time on financing with lower credit score requirements, a short-term loan might be the way to go. Online lenders have streamlined the short-term loan application process, as well as subsided the eligibility requirements both for individuals and businesses.

Short-term loans have relatively low financing risk because they usually offer a capital that caps at $250,000 and a repayment period for 3-18 months only, unlike that of SBA. Plus, you may have the loan even with a credit score of 550.

Takeaway

Here’s the catch: the higher your credit score, the lower the interest rate. Plus, other lenders may also lessen their required down payment if you have a high credit score. That’s why it’s recommended not to settle for loans that require a low credit score, especially if you want to pay lower interest rates and downpayment.

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