Is SBA Loan Based On Credit Score?

An SBA loan is a type of loan available for small businesses which is partially guaranteed by the SBA; the Small Business Administration.

Due to the tight lending standards and the complex application process, it can be difficult for businesses to take advantage of the low-interest rates and flexible terms. 

Though SBA loans are guaranteed by the Small Business Administration, they are issued via a lending institution which is typically a credit union or bank.

Is SBA Loan Based On Credit Score

The Small Business Administration doesn’t specify a minimum credit score requirement as the lending institution can set their own guidelines to determine the creditworthiness of each applicant. As such, the application requirements are unique to each lender. 

The desired credit score rating can differ depending on the type of loan that you are applying for. Typically lenders expect applicants for an SBA 7a loan to have a minimum credit score of 640.

Though credit scores of this kind can still be accepted, you will improve your chances of approval if you have a credit score of 680 or above. An SBA 7a loan is recognized for its versatility and is one of the most common programs.

The funds from this loan can be used to purchase real estate and equipment or to finance working capital. 

Generally, applicants will need to have a credit score of 660 to apply for an SBA 504 loan, however, there are instances where the requirement may be as high as 680.

This loan offers less flexibility when compared to the 7a loan, but it can be used for hefty expenses such as equipment and real estate. 

Due to the purpose of an SBA disaster loan, the application process isn’t as rigorous as other programs. Typically, the SBA looks for a minimum credit score of 620.

There is a possibility that you may still qualify for an  SBA disaster loan even if your credit score is not quite at the 620 figure. As implied by its title, a disaster loan is applied for by those in distressed areas who have experienced a disaster. 

Those who are applying for an SBA Microloan are required to have a minimum credit score of 640. However, strong applications may be approved with a credit score of 575 but in the majority of cases, a credit score of 640 is desired.

A microloan is a loan that offers applicants a smaller sum of money. It is intended for startups and small businesses but is issued by an individual or a non-profit organization rather than a bank. 

Although a specific credit score rating isn’t set in stone by the SBA, applications will encounter a challenge when attempting to apply for a loan if their credit score does not meet the requirements as stated above.

As these figures concern the minimum requirements, you will find some lenders that look for a credit score that is quite a bit higher than this. For example, some will want their applicants to have a credit score above 700.

As touched upon, the requirements will differ between lending institutions and you will find some with firmer requirements than others. 

What are the non-credit SBA requirements?

You will be in a stronger position if you meet the minimum credit score requirements, however, this isn’t the only factor that the lenders will take into consideration before assessing your eligibility for the loan.

The institution will also look at how the business operates to make an income, whilst also assessing the characteristics of the business owner. 

The requirements that do not relate to credit score, can also differ depending on the loan that you are applying for. This is because the application process for some types of loans is less extensive than others. 

Before approving you for any type of loan, the lending institution will want to see that your business generates enough revenue to cover your debt as well as the running of the business itself.

Aside from this, they will also want to see that your company has enough long-term business. With certain loans, your approval will be determined by the number of employees that work for your company.

For example, eligibility for an SBA 7a loan is approved to those who have less than 500 employees. They also look for businesses that have made less than approximately $7.5 million over a three year period.

Applicants for an SBA 504 loan must operate a for-profit company that has a net income that averages less than $5 million after federal taxes have been deducted for two years prior to the time of application. 

Aside from a credit score of at least 620, individuals who are applying for an SBA disaster loan will need to ensure that they have all of the necessary documentation available.

Those who are applying for an SBA microloan must be operating a small for-profit business, collateral, and the personal guarantee of the business owner regarding their ability to meet the loan repayment obligations.

What is the importance of your credit score to the SBA?

Your credit score serves an important purpose to the SBA because it highlights your capabilities when it comes to handling your finances. As the SBA guarantees the loans, they will be responsible for paying the lender the remaining figure that they guaranteed.

Because of the responsibility that they have for such payments they essentially use your credit score to assess your reliability as it will tell them how likely it is that you are going to make the repayments.

By considering your credit score, they also reduce the risk that they are confronted with. Although the SBA doesn’t specify rigid credit score requirements, they certainly view it as an important factor in your application.

The importance of your credit score can fluctuate depending on the loan that you are seeking. In many circumstances, they will review your whole application and account for other factors before arriving at a decision as to whether you meet the qualification criteria for the loan or not. 

What can you do if your credit score does not meet the minimum requirement?

Do not be completely deterred if your credit score does not meet the minimum specified by the lending institution. Although it will make the application process more challenging and risk your application getting denied, there are solutions available.

Of course, one of the most obvious things to do is to work on your credit score. You should focus on improving your score as this will increase your chances of your application being approved.

You can do so by making sure that all payments are made on time and any existing debt that you may have from previous loans is repaid. If you are unsuccessful in your application with one lending institution, you may wish to try another SBA lender as you may have more luck elsewhere.

You will sometimes find that some lenders have more lenient requirements than others. If your credit score doesn’t quite meet the figure that is stated, but your application is strong in other areas, you may wish to proceed with your application anyway.

If the lending institution is impressed with other aspects of your application, they may make an exception and approve your application anyway.

The SBA also has some programs that offer more flexibility than others and will also ask you to submit fewer documents to support your application than others.

Final Thoughts

As you can see, the SBA will consider your credit score when reviewing your application but this will not be the only factor that they look at. In most cases, you will have more success with your application if your credit score meets or surpasses the minimum figure that they ask for.

Furthermore, besides ensuring that you have a good credit score, you will also need to make sure that you have a strong application that meets their other criteria.

Although the whole application process may seem difficult, many individuals will still be in a position where their loan gets approved. 

Ultimately, you will need to show the lending institution that you are reliable and will be able to make your repayments on time. Also, you will need to remember that some lenders will ideally want applicants to have a credit score that exceeds the minimum stated.

Your credit score will show the lender how credible you are and worthy of being approved for the loan.