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SBA loans, or Small Business Administration loans, are government-guaranteed loans intended to help small business that may not qualify for credit from traditional sources get the funds they need. SBA loans are much easier to qualify for and have more flexible terms than conventional business loans. However, some business owners assume that because SBA loans are more accessible, they do not look at the owner’s credit history or financial record. In reality, credit scores still matter a great deal when it comes to SBA loans, and we’ll explain why.
SBA Basics
SBA loans have relaxed qualification requirements in several ways. First, the SBA permits higher loan-to-value ratios—you may be able to borrow up to 90% of your financing needs with an SBA loan. Secondly, your lender will consider your business’ projected income rather than your historical cash flows alone. Business owners and entrepreneurs can use SBA loans to renovate property, purchase machinery or equipment, borrow working capital, or fund the purchase of a new business.
Personal Credit vs. Business Credit
Before we address the relevance of credit to SBA loans, it’s important to first discuss the relationship between personal credit and business credit. Some business owners believe these credit scores are two different things and have no impact on each other whatsoever. Though the scores do evaluate two different things, they are inextricably related. When you start a business, your business’ credit is built on your personal credit. You have not yet established a credit history for your business, so lenders will instead use your personal credit to determine your borrowing options. For this reason, the SBA recommends that entrepreneurs make sure their credit scores are up to par before they begin their business venture or apply for business credit. Once you have established business credit history, you can find your business credit score online.
Qualifying for an SBA
The eligibility requirements listed on the SBA’s site do not specify good credit as a prerequisite, but it is implied in some of their qualification requirements. Similarly, SBA loans are issued by private lenders, not the government, and private lenders will always investigate your credit history before issuing you a loan. Here is a list of what the SBA seeks in a loan application:
- Repayment ability - the SBA wants evidence that the cash flow of the business will be sufficient to repay the loan.
- Good character - the SBA lists this as an important consideration on its website. Usually, good character as it relates to one’s finances is measured by the FICO credit score.
- Collateral - securing the loan with a piece of property may improve your chances of qualifying.
- Owner’s equity contribution - the SBA expects business owners to put forth as much of their personal funds as possible.
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