Why You Need Good Credit to Get an SBA Loan
So you’re ready to launch or expand your small business. You have done all of the necessary research, created a business plan, and examined the various reasons small businesses fail (so you can avoid those mistakes). Now you need money to take your vision to the next level.
Many small business owners have successfully landed funding through the Small Business Administration’s variety of loan-guarantee programs. Even though the SBA-qualifying standards are more flexible than those for other types of loans, it’s important to know that most lenders will ask for specific information before they decide whether to use an SBA loan program. They’ll want to see a business plan, which is a description of your business, projected annual sales, number of employees, etc. They’ll want to see a loan request detailing how much money you’re after and how the funds will be used. And they’ll want to see a description of collateral you’ll be offering to secure a loan, including equity in the business, borrowed funds, and available cash.
Some people believe that the SBA helps people with bad credit get loans. This is not true. The SBA can provide assistance when a borrower’s collateral doesn’t meet conventional lending standards, but it still requires a good credit history. In fact, this will play a critical role in your ability to secure a loan. So if you are looking for an SBA loan, now is the perfect time to find out your FICO score.
What Is a FICO Score?
A FICO score is a way of measuring your creditworthiness without accessing your income history or employment status. It was originally developed by the Fair Isaac Corporation and is now widely used by major credit reporting agencies. Most, if not all, sources of financing or credit have come to rely on your FICO score to determine your creditworthiness and thus the interest rate you’ll be charged.
Before a score can be calculated, you must have at least one credit account that has been open and active for at least six months. This is the bare minimum for calculating a FICO score. Most lenders like to have three or four credit accounts dating back at least one year.
How FICO Scores Work
A FICO score predicts the likelihood of your making good on your loan. FICO scores range from around 300 (bad) to 850 (excellent). The score reflects your credit payment history, the number of open accounts you have, your overall credit balances, and public records, such as judgments and liens against you.
If you’re looking for funding, a FICO score above 680 will generally produce a positive response, while a score below that will likely cause lenders to be more cautious. A simple way to check your score is to enter “FICO” on an Internet search engine. The responses will list various sites where you can calculate your score for a nominal fee. Services like MyFICO will provide you with several report formats. MyFICO will also notify you of any credit inquiries that have been made about you (these may also affect your score).
Susan Konig is a freelance writer in New York. She has been writing about finance for 15 years, for publications including Crain's New York Business, The New York Times, and Registered Representative, a national publication for financial advisors.
