What Credit Score for a Business Loan Do I Need? - Small Business Trends

What Credit Score for a Business Loan Do I Need? - Small Business Trends


What Credit Score for a Business Loan Do I Need? - Small Business Trends

Posted: 09 Jun 2020 08:39 AM PDT

When it comes time to qualify for a business loan, your credit score is one of the top factors that lenders consider. We answer several frequently asked questions (FAQ) about your credit score for a business loan, below.

What is Considered a Good Credit Score?

A good personal score to get a business loan is 720 and above. A good business credit score is 80 or above.

Keep in mind, the various credit bureaus may have different scoring systems. Every lender chooses its own standards. So there may be variations in scoring levels. However, the 2020 Small Business Credit Survey (p. 12) by the U.S. Federal Reserve Banks lays out the general rule for the small business lending industry:

  • Low credit risk: 80–100 business credit score or 720+ personal credit score.
  • Medium credit risk: 50–79 business credit score or a 620–719 personal credit score.
  • High credit risk: 1–49 business credit score or less than 620 personal credit score.

Borrowers who are low credit risks get the most choices of loan products and the best terms. Borrowers who are high risk have few choices and will pay the most. Getting even a small loan for business could be tough for high risk borrowers.

Is There a Minimum Credit Score for a Business Loan?

Technically, there is no minimum credit score for a small business loan. Every lender has its own requirements.

That said, there are some general rules of thumb in the industry. In practice, a personal score of 620 is widely recognized as the minimum. More than likely you will need a score of 720 or above for good business loan terms.

Can I Get a Business Loan with a 600 Credit Score?

Business owners often want to know: can I get a business loan with a 600 credit score? Or with some other number such as a 500 credit score?

The answer is, it's going to be hard to get a business loan with a score of 600 or less.

What can you do? If your need for money isn't urgent, try to improve your credit score enough to get out of the high risk category. That's the best long-term option. If you need money right away, look into one of the "no credit check required" loans below. Also, see: Small Business Loans with Bad Credit.

Business or Personal Score – Which Matters Most?

To get a loan for a business, most lenders will look at both your personal and business credit scores. But a good personal credit score is key.

Remember, a personal credit score and a business credit score are completely different things. They use different scoring systems. Even the credit bureaus are different. Some like Experian report both types of scores. Dun & Bradstreet is strictly business credit reports. A FICO score is a personal score.

Depending on the type of funding you apply for, most lenders will want to check both scores upon your loan application.

Now, you might wonder, why does the lender have to check personal credit scores for a business loan?

It's due to the fact that "owners' personal finances remain deeply intertwined with the finances of their businesses," according to the 2020 Small Business Credit Survey. Professor Scott Shane adds that personal credit affects a business loan because so many small businesses are sole proprietors. Therefore, he says, "the business debts are not legally distinct from those of the owner." He also notes that nationwide, more than half (56%) of small business loans will require the owner to give a personal guarantee, for much the same reason.

Bottom line: most business lenders will want to look at both your personal credit report and business credit report. But personal credit scores remain key.

What Happens if My Credit Score is Low?

If your credit score is low, your small business loan application could be denied altogether. But loan denial is just one of the adverse consequences — there are others.

According to a study by Fundera, the benefits of good business credit can be measured in dollars and cents. Bad credit often results in the following:

  • Smaller loan amounts. A good credit score can mean getting approval for up to 20 times more loan money than if you had a bad score!
  • Higher interest rates and fees.
  • Shorter repayment term, in turn requiring higher payments and squeezing cash flow. Per Fundera's information, business owners with good credit got an average of about 16 years to repay their loans. People with poor credit got just 8 months.

To compare how interest rates and other terms make a difference, run scenarios on the business loan calculator.

Do I Need a Business Credit Score at All?

A business credit score is not necessary in all cases to get a small business loan.

Small business lenders are pragmatic. A business bank may recognize that a startup with very few years in business won't have an established business credit history. Sole proprietors may lack an established business credit history because of operating the business mostly in the owner's name. In those cases lenders will rely heavily on the owner's personal score.

However, having a business credit history / score increases your options.

Do Lenders Count Credit Scores of Part Owners?

Yes, lenders typically count the personal credit scores of part owners who own at least 20% of the company. This includes business partners in a partnership, or any person in a corporation or LLC owning at least 20% equity. Originally a standard requirement by the Small Business Administration for SBA loans, the 20% rule has now become part of traditional underwriting standards. If more than one part owner has low scores it could be especially problematic.

Can I Get A Business Loan Without a Credit Check?

Yes, it is possible to get a business loan without a credit check. However, you will be limited to a few financing options such as invoice financing, factoring, cash advances, and certain microloans. Crowdfunding and private loans from friends and family are also possibilities.

Make sure to understand the pros and cons of no-credit-check options:

  • Positive — Some financing types such as cash advances can be super fast. You get money within hours or a day or two.
  • Negative — No-credit-check loans can be expensive with high fees. Interest rates and APR (annual percentage rate) are higher than traditional loans. For cash advances, you lose control. Example: payments may be automatically deducted from your bank account at inopportune times, triggering financial consequences like bounced checks.

What are Examples of Loans Requiring No Credit Check?

One example of a no-credit-check loan is PayPal Working Capital. Small businesses that use a PayPal business account to process at least $15,000 in annual payments can apply for working capital loans. Right on its website PayPal states:

No credit check. Your loan is based on your PayPal sales, so no credit check is required, and it doesn't affect your credit score.

Square Capital is another popular example that does not require a credit check. Square Capital is open to businesses using the Square payment processing device. The way it works is that Square knows your history of payments received, and can estimate how much you will receive in the future. Your loan amount is based on your volume. Repayment will be automatically deducted from future sales, according to the Square website.

A third example of a no-credit-check option is Stripe Capital, for businesses using the Stripe online payments system.

There are many others. Check for online lenders that provide cash advances without a credit check.

Should I Use Personal Credit for Business Purposes?

No, not long term. Instead of business loans, some small business owners turn to consumer credit, such as home equity loans and personal credit cards. Getting consumer credit is often easier if your business lacks an established credit history. However, relying solely on personal credit sources is not a good long term strategy. Here's why.

When you rely solely on personal credit cards or consumer loans in business situations, you may find yourself maxed out at the worst possible time. That's because your business and your family have to share a single credit limit. Let's review an example of how this limits you.

  • Suppose you have a personal credit card and a home equity line with a combined credit limit of $50,000. You decide to use all of that available credit to fund business expansion. The problem is, you've left nothing for personal purposes. Consequently, if your truck breaks down, you have no credit available for emergency repair bills. Your credit limit is fully tied up in the business.
  • But let's suppose you also obtain a business loan of $60,000. That would give you a higher total credit limit overall. You would have a total of $110,000 ($50,000 personal + $60,000 business).

Do you see how having more total credit available would allow you to expand your business — without limiting funds you might need for family expenses? That's why your long term plan should be to build business credit.

Will a Lender Ignore Poor Credit if I Offer Personal Collateral?

No. Some small business owners incorrectly assume their credit scores will not matter if they offer up personal collateral such as a motorcycle or RV. It's important to remember that a traditional lender does not want property. The lender is in the loan business. The lender wants you to repay the money.

Back in my days in banking, we considered it a final last resort to repossess assets. That's because there are many expenses involved in repossessing vehicles or levying against other assets like equipment. Then the lender still has to turn around and find a buyer for the assets. All the while, the collateral is depreciating in value. Months or years later the lender may recover just pennies on the dollar from liquidating collateral — and still be left with an unpaid deficiency.

That's why most lenders check with the credit bureaus. They want to ensure borrowers have a good record of paying their debts. But don't be confused. Yes, a lender may likely require a personal guarantee and business collateral such as a UCC filing on accounts receivables as repayment leverage. But the lender gets to this point only after first conducting a credit check.

Now, what if you own personal assets but have poor credit? You could:

  • Sell the items. Put an ad on Craigslist, in local classifieds or in specialty classifieds such as ATVTrader.com.
  • Pawn the items at a local pawn shop. No credit check is required.
  • Check finance companies for loans. Warning: finance companies charge high fees and offer short-term loans in amounts under $20,000. There are some decent finance companies but also bad ones. The Federal Trade Commission strongly advises against predatory financing like car title loans.

As you can see from these FAQs, your credit history — personal and business — makes a significant difference. Whether for an SBA loan, equipment financing or other business loans, credit scores matter.

Image: Depositphotos.com


Millennial Money: How a business credit card fits gig work - Washington Post

Posted: 12 May 2020 03:47 AM PDT

Here's how to maximize your miles and points on a summer road trip - Android Central

Posted: 09 Jun 2020 10:07 AM PDT

Heads up! We share savvy shopping and personal finance tips to put extra cash in your wallet. Android Central may receive a commission from The Points Guy Affiliate Network. Please note that the offers mentioned below are subject to change at any time and some may no longer be available.

Summer is upon us and every state has at least partially reopened. While travel is slowly picking up again, it's fair to say that many people will choose to stick closer to home this summer and embark on road trips instead of taking the skies.

It probably goes without saying that points and miles are best for first-class flight redemptions and high-end hotel stays. However, with a little bit of research and planning, you can still get terrific use from them with road trips. Your road trip can also be a great opportunity to quickly rack up a significant amount of points and miles for when you are ready for that more exotic vacation.

Best VPN providers 2020: Learn about ExpressVPN, NordVPN & more

Saving money on your rental

Unless you're using your own car, the first step of the road trip planning process is booking your car or recreational vehicle (RV) rental. You can save on rental car bookings by using AutoSlash, which notifies you when your car rental price drops. You can also save on your RV by booking a relocation rental, which can cost as little as $1.

By going through a shopping portal and including your frequent flyer number in your booking, you may even be able to earn airline miles on your rentals

hertz-presidents-circle-cars-washington-dulles-iad-airport-2019

Source: The Points Guy

Maximizing rewards with the right credit card

Using the right credit card is also important when booking your rental. You'll want to use a card that provides primary car rental insurance and earns bonus points on travel spending. The Chase Sapphire Reserve and Chase Sapphire Preferred Card both offer primary rental coverage, meaning you can decline the rental car company's collision insurance and be covered by the card in case anything goes wrong.

If you carry an American Express card, you can also pay a premium to enroll in Amex's Premium Car Rental Protection program. Just note that most cards with car rental coverage exclude RVs.

Regardless of whether you're using your own car or renting, you'll want to maximize the points you'll earn on gas. There are a number of consumer credit cards that can get you returns of 3% or more on gas spending. Your options include the Amex EveryDay® Preferred Credit Card from American Express and Hilton Honors American Express Surpass® Card, but you can see this post for an extensive list of the best cards for gas spending.

The information for the Amex EveryDay Preferred card has been collected independently by The Points Guy. The card details on this page have not been reviewed or provided by the card issuer.

Accommodations

Accommodations are another major expense on road trips. Fortunately, hotels and Airbnbs are currently undergoing strict cleaning regimens and offering enticing promotions to lure potential travelers.

If you're redeeming points and booking through a hotel program that uses dynamic award pricing or peak and off-peak pricing, your stay will likely cost less than usual, given the drop in demand. World of Hyatt recently postponed its mostly negative award chart changes until 2021, so now is a good time to redeem any points you've been saving up.

Plus, unlike typical vacations, you'll likely be staying at many different hotels during a road trip. This is great if your points are spread across different hotel programs and you only have enough for one to two nights with each chain.

It may also be a great time to use your free night certificate that you earn each card anniversary with the Marriott Bonvoy Boundless Credit Card or the IHG® Rewards Club Premier Credit Card. American Express recently announced that all Hilton Honors American Express Aspire Card weekend night awards issued through Dec. 31, 2020 will be valid for 24 months and on any night of the week.

If you need some inspiration on which points hotels to stay at, check out TPG's guide to the top American road trips to take with the family.

(Photo courtesy of Hyatt Regency Hill Country Resort & Spa)

Source: The Points Guy

If you're paying out of pocket, be sure to use a credit card that offers extra points on hotel spending. Or if you're booking an Airbnb, you'll need a card that offers bonus points on general travel purchases. Depending on how low the cash rates are, it might make more sense to book your stays through your credit card's travel portal than transferring them to the hotel program so make sure to do the math to see which option makes the most sense for your situation.

Activities

Believe it or not, you can get great value by using your points to book activities. The Chase Ultimate Rewards Travel Portal allows you to redeem points for all types of travel, including car rentals and activities. If you hold the**Chase Sapphire Preferred or the Ink Business Preferred Credit Card, each point is worth 1.25 cents (so a $100 activity would only cost 8,000 points).

If you have the Chase Sapphire Reserve, your points are worth 1.5 cents apiece (so a $100 activity would only cost about 6,700 points). That's a lot more generous than most other credit card travel portals. Expedia operates the Chase Travel Portal so, if an activity is available on Expedia, it should be bookable through Chase and at the same price.

The information for the Ink Business Preferred has been collected independently by The Points Guy. The card details on this page have not been reviewed or provided by the card issuer.

Teenagers riding horses

Source: The Points Guy

Most credit card issuers typically do not count sightseeing activities and tourist attractions as travel. So, if you're not redeeming points and are planning to pay cash, be sure to use a card the offers a good return on everyday spending, like the Chase Freedom Unlimited®, to maximize your return.

The information for the Chase Freedom Unlimited has been collected independently by The Points Guy. The card details on this page have not been reviewed or provided by the card issuer.

Bottom line

Points and miles are not just about first-class flights and fancy hotel stays. At the end of the day, they are a means to an end. That end can be a road trip, and as you can see, there are still many ways you can get use from them if you take this route. Just be sure to research the status of any places you plan on visiting and be ready to comply with any PPE or social distancing requirements in place.

Related: 10 tips for anyone taking a road trip right now

Featured image by Thomas Barwick/Getty Images.

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How a business credit card can help gig workers | News, Sports, Jobs - Escanaba Daily Press

Posted: 16 May 2020 12:00 AM PDT

FILE - This Aug. 11, 2019, file photo shows an American Express card in New Orleans. People who freelance or side hustle for work could have access to a useful tool they may not have considered within their reach: a business credit card. You don't need employees or an LLC to qualify for these cards, which typically offer bigger sign-up bonuses and different rewards than personal credit cards. (AP Photo/Jenny Kane, File)

Entrepreneurial types who freelance and side hustle their way through the week likely have access to a tool that could help them thrive: a business credit card.

If you drive a rideshare part time, regularly resell on eBay or book paid photography jobs on the side, you may qualify for a business credit card. You don't need to have a storefront, employees or an LLC.

That's useful information for the movers and shakers of the gig economy because credit cards aimed at small businesses differ from personal cards. They offer more lucrative rewards and eye-popping sign-up bonuses you won't find on most personal cards.

While a business credit card alone won't determine whether your business prospers, small-business customers seem to like them. They are "significantly more satisfied" with their business credit cards than customers are with personal credit cards, according to a 2019 study by J.D. Power.

Among those is small-business owner Joe Brancatelli. He's a publication consultant and founder of the business-travel subscription newsletter "Joe Sent Me."

He considers his business credit cards among the tools that help make his business go. "They help me segregate my personal and business spending, which is important for tax and other reasons," he said.

The cards also help cash flow. "It's relatively easy access to credit, which some business folks can't get otherwise," he said. "The same bank that might turn you down for a traditional business loan will give you a small-business credit card."

Of course, the key is to use the card's credit line strategically without paying interest, he said.

QUALIFYING AS A BUSINESS

You don't need a business credit history to qualify for a business credit card. If you engage in an activity that earns money without being someone else's employee, you're a business.

Your business doesn't even need to make a profit, and you can say so on the application. If you don't have a separate tax ID for your business — many sole proprietors don't — you can use your Social Security number.

GETTING APPROVED

You qualify for a small-business credit card based on your personal credit history. Credit scores of 690 or above generally qualify, although issuers have their own approval criteria, which can vary by type of card.

ADVANTAGES

Business credit cards typically come with bigger sign-up bonuses than personal cards. The difference can mean hundreds of dollars in rewards value.

Rewards on business cards might fit your spending better, too. For example, business credit cards might offer extra cash back for spending on office supplies, advertising and telecommunications services. Those could be more useful than bonus categories on a personal card that might include groceries, streaming services or home-improvement stores.

Business cards typically come with a higher credit limit. And the fees can be tax-deductible when used for business spending only.

Among the biggest benefits is simply having a separate card for business spending. That can help with expense tracking, running financial reports and gathering tax-return information. Employee cards are typically free.

DISADVANTAGES

Although it's a credit card for your business, you generally have to provide a personal guarantee. That means if your business goes belly up, you're personally liable to pay — even if your business structure otherwise protects you from liability, as with a corporation or LLC. Think of it as you, personally, co-signing for the credit card.

And if you want to build personal creditworthiness through your business credit card, that might not happen. Not all business credit cards report to consumer credit bureaus.

Business cards aren't covered by the same federal consumer protection laws as personal cards. But issuers generally voluntarily offer similar protections, such as limits on fees, interest calculations and disclosures.

And those big sign-up bonuses? They typically require more spending on the card before you can earn them.

HOW TO CHOOSE

Picking a business credit card is similar to choosing a personal card: Find one that fits your needs and business spending patterns. If you plan to carry a monthly balance, a card with an interest-free period or low ongoing interest is more important than rewards.

If you'll pay in full, rewards cards are a good choice. They come in the same flavors as personal cards: cash back, points or airline miles. The best cards may have annual fees, but some don't. Business travel credit cards offer perks that road warriors would appreciate.

If your goal is to build a business credit history, make sure your new business credit card reports to the main commercial credit bureaus: Dun & Bradstreet, Experian and Equifax.

— — —

This column was provided to The Associated Press by the personal finance website NerdWallet. Gregory Karp is a writer at NerdWallet. Email: gkarp@nerdwallet.com.

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