How Credit Scores Affect Small-Business Loans

You’re not a number, you’re a person . . . except when it comes to credit scores. Then yes, you’re a number. But at least that number isn’t determined by a single institution through largely clandestine practices, right? Sit down; we have news.

When processing small-business loan applications, most banks and lenders like to see a personal credit score of 620 or higher. For a majority of the time, that score is determined by FICO, a data analytics company founded in the 1950s as Fair, Isaac and Company (hence the acronym). There are some lenders that will overlook a sub-600s score and take a chance on small businesses with no or bad credit, but a good FICO score is a nearly universal deciding factor. The higher that score, the more money you’ll usually be able to borrow for your business.

Upstart, non-FICO credit scoring systems have been tagged with the nickname “FAKOs” (pronounced “fake-o”). While they use similar methodology and arrive at numbers not dramatically different from FICO scores, they’ve achieved only a fraction of FICO’s market saturation. FAKOs include VantageScore (jointly developed by Equifax, TransUnion, and Experian), PLUS (developed by Experian), and TransRisk (developed by TransUnion). Know when you’re looking at a FICO or a FAKO score.

Carrying too much debt can lower your credit score. Your debt-to-income ratio is calculated by adding up all of your monthly debts and dividing them by your gross monthly income (before taxes). Most lenders set their limit at a 36% debt-to-income (DTI) ratio.

There’s many a story about entrepreneurs who’ve launched businesses by spreading the cost across multiple credit cards—but they tend to leave out one detail: a credit score of 680 or above. Without that, it’s difficult to get one card, let alone several, with low interest rates and high balances. On the upside, credit cards provide access to cash quickly and offer the aforementioned low interest rates, payment flexibility, and an unsecured line of credit (meaning you won’t have to put up collateral, like your house).

You’ve seen the commercials for apps that let you check your credit score for free with no negative effect on your number. That’s probably true, but a little misleading. First, sometimes those apps are sending you to a FAKO (always check the source). Second, checking your own credit score, known as a soft inquiry, has always had zero impact on your digits. Only official bank checks upon application for a loan or credit card, known as hard inquiries, affect your credit score (usually knocking off five points or less, then disappearing after two years).

Failure to pay non-debt bills, such as utilities and rent, doesn’t count against your credit score. So even without lights, water, or even an apartment, you could still theoretically boast a 680—though it may be difficult if you also neglected to pay your internet or cell phone bills. Important note: collection accounts and unpaid medical bills do not fall under the non-debt umbrella.

In the cold, analytical eyes of FICO, you may be a number, but it still takes people to build businesses—and credit scores. Creating and maintaining a good credit history is essential to hitting the FICO sweet spot, which can mean the difference between getting your business off the ground or never moving past the planning stages. There are few outside influences that will affect your business future more. So learn your FICO score, then work toward raising it.

Enter your loan needs and qualifications to get matched with a list of lenders best suited to you. Then, sort by the financing factor that you find most important. (Note: not all lenders allow personal loans for business use.)

So you know what a credit score is, where they get calculated, and how to improve yours. Now you just need to put it into practice. These terms may make it sound difficult at first, but rest assured. Once you start monitoring your credit regularly and making timely payments, your credit score will raise far above the average requirement needed for a loan—and you'll get the funding you need to start or scale your small-business.

Need a credit card but haven't built up your credit yet? Here are our 8 Best Credit Cards for Bad Credit.

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