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The Credit Question: How Big Of A Role Does A Credit Score Play In Small Business Lending?

The Credit Question: How Big Of A Role Does A Credit Score Play In Small Business Lending?

For many small and medium-sized businesses, concerns over credit and the terms of a loan often stop the search for financing before it even begins. That reticence could also stifle plans to expand operations, invest in capital expenditure, or improve employee salaries.

But what if your business credit score, or even your personal credit score, is not as much of a non-starter as they often appear? Flawless credit might be necessary for securing financing from banks and other traditional lenders, however, there are plenty of other debt financing sources and a variety of other factors that impact your chances of getting a business loan, capital advance or line of credit.

Are You Giving Credit Too Much Credit?

The primary way traditional lenders and financial institutions evaluate potential borrowers is based on their underwriting risk. That’s the entire reason credit scores exist—to provide lenders with a simple gauge of a person or company’s borrowing history, repayment history, and probability of repayment.

For businesses seeking loans of less than $1 million, banks and even the government’s Small Business Administration look at FICO’s Small Business Scoring Service score as a primary factor in a company’s underwriting risk and ability to repay.

An SBSS score can range from 0-300, with 300 representing a perfect credit ranking. Most traditional lenders set the score’s floor at 160, though the federal government's Small Business Administration might consider scores above 140.

While Fico’s SBSS is the primary credit indicator traditional lenders use in determining whether to offer a business loan, it’s not the only credit score influencing your ability to borrow. Newer businesses with less established credit history often have no choice but to utilize the owner’s personal credit score, which banks typically look into regardless of your SBSS score.

In order to get this information, institutions need to perform a hard credit check, which will have a negative impact on both your business and personal scores. And even if your credit scores are within an acceptable range, there is no guarantee that you’ll find a lender willing to offer a loan with the timeframe or terms you’re seeking.

But by that same token, other mitigating factors exist that can and will help to secure a loan on your own terms.

More Than A Number

Despite their dependency on credit scores, even banks understand the limitations of credit history as it relates to a business’s probability of repaying a loan. However, while a bank may still extend a loan to a business that falls outside their typical lending portfolio, it usually comes with increased collateral requirements, higher APR or even a diminished loan amount.

For businesses less than two years old, Small Business Administration loans are often their first choice over traditional bank loans. SBA loans are generally more accommodative toward startups, putting less emphasis on credit and more on effective management and solid record-keeping. However, with less stringent loan requirements comes increased oversight and prolonged fulfillment times, anywhere from 1-3 months or more of waiting before approval.

These standard approaches to lending have stymied many early-stage businesses from growing at a consistent pace and has even prevented otherwise healthy businesses from preparing financially for seasonal or other kinds of external risks. As a result, only companies with very specific profiles and funding needs are able to find exactly what they need from traditional lenders, which is why the emergence of fintech in the business lending space has been such a game-changer.

Founder and co-CEO of online small business lender Credibly Ryan Rosett explains, “Historically, there has been a credit gap for small business owners seeking financing, and this is primarily due to an overemphasis on outdated standards of business health. We take pride in our ability to more effectively measure overall business health and provide this underserved segment with the financing they need.”

For example, companies applying for financing through Credibly can prequalify online for up to $400,000, with approval in less than 24 hours. To prequalify for such a loan, companies only need to be in business for at least 6 months, have a FICO SBSS score above 600, and demonstrate average monthly revenues above $15,000 over the past 90 days. As they only need to perform a soft credit check to generate a preliminary offer, there’s virtually no risk to applicants' credit score or ability to borrow in the future.

The difference is that Credibly and other lending fintechs analyze your overall business health and viability as the primary indicator of future repayments. Credit scores, on the other hand, are, by design, backward-looking tools. Fintech lenders leverage a plurality of company data that goes far beyond legacy financial metrics to create a more accurate picture of a company or owner’s ability to repay a loan.

While there are many financing options to help achieve this, small businesses shouldn’t limit their sights just because traditional lenders only think of them as a number.

Credibly is a content partner of Benzinga


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