When you are looking for business financing options, you may be coming across issues with your personal credit scores. You may even think you need a bad personal credit business loan.
But the problems in your personal credit score might not all be your fault.
For any loan, it’s vital to have a good personal credit score. But what if your personal credit score falls and you had nothing to do with it? Or you tried to fix it, but your complaint fell on deaf ears?
You would be far from alone.
Senatorial Inquiry
On October 17, 2022, Rep. James Clyburn, the chair of the House Select Subcommittee on the Coronavirus Crisis, asked the CFPB (Consumer Financial Protection Bureau) to investigate Experian, Equifax, and TransUnion for allegedly failing to address consumer disputes during the pandemic.
The select subcommittee said it found evidence that the agencies discarded disputes without investigation. Clyburn said the major credit bureaus potentially violated the Fair Credit Reporting Act.
During the pandemic, the number of credit disputes leading to relief dropped from 25% to 4.1%. This alerted the House Select Subcommittee on the Coronavirus Crisis that something was amiss.
But a poor personal credit score doesn’t just affect your personal finances and ability to borrow as a consumer. It also affects your ability to get small business loans. And it even affects some business credit scores.
How Were Personal Credit Scores Affected?
Consumers were directly affected since low credit scores will inevitably lead to not getting competitive interest rates when they try for a term loan like a mortgage or to buy a vehicle.
Errors in a personal credit score also affect loan approval directly. They will affect the loan amounts you can get and the loan terms.
Of course, you will always have to pay interest. But with a bad credit history, you’ll be paying higher rates.
Personal Credit Report Issues
Because the personal credit bureaus ignored consumers’ disputes, consumers did not get a chance to improve their personal credit reports.
Unfixed errors can be very expensive. The CFPB received over 619,000 complaints in 2019 alone. It is highly likely that the lack of action by credit reporting agencies costs consumers millions of dollars.
The bureaus’ inaction may very well have cost consumers houses and jobs as well.
Does a business loan affect personal credit? If a lender looks at your personal credit and performs what is called a “hard inquiry” then yes, it can bring your score down, but usually just briefly.
How Were Business Credit Scores Affected?
Experian and FICO SBSS both use personal credit history as a percentage of their calculation of your business credit score.
And while Dun & Bradstreet and Equifax do not use personal credit, in their calculations of a business credit score, lower credit scores with FICO SBSS will directly affect whether your small business can get SBA business loans in any loan amount.
Small businesses which may have been forced to settle for a bad credit business loan would have had to pay more in interest, with shorter terms, and less money available.
According to the Wall Street Journal, there were 200,000 more business closures during the pandemic than normal.
How many of those could have been prevented if entrepreneurs had been able to get the best business loans, instead of the bad credit business loans they may have had to settle for?
Why Credit Scores Matter When Applying for a Small Business Loan
Many lenders, such as the Small Business Administration, will review your personal credit score when checking your eligibility for business loans.
A bad personal credit score can affect your interest rates, how much you can get, and the term of your loan. That is, if you can get approval of your small business loan application at all.
Is There a Minimum Credit Score for Business Loan Eligibility?
For an SBA loan, it’s generally around a 640 FICO score. But even preferred SBA lenders typically have their own requirements. So small business owners may find the minimum personal credit score allowed is higher than that.
Other business loans will, of course, have requirements that are set by the lender. With startup business loans, personal credit history will loom large. That, along with (often) a business plan, will be necessary to get approval.
What Credit Score do I Need to Get Business Loans?
Minimum credit score requirements will vary by the lender. However, a business owner with poor personal credit may still be able to get business financing. But it will pay to think outside the “business financing box”. Term loans aren’t the only game in town.
Rather than trying for SBA loans, small businesses with principals with poor credit can try a few business funding options.
Merchant Cash Advances
An MCA can be a good choice for a going concern with proven incoming credit card payments from their customers. Credit history will not matter, so long as the merchant cash advance provider can tell that the customers of the small business will make timely payments.
If you’re asking, “Can I get a business loan with bad credit?” the answer may very well be to expand your definition of what a loan is.
Invoice Factoring
Somewhat similar to an MCA, this is when you sell your outstanding invoices to a lender. The factoring company pays a small business owner a large percentage of the invoices and collects from the customers.
Again, a bad credit score isn’t going to matter much because the factoring company is more interested in whether the customers with outstanding invoices have a good payment history. The factoring company may want to check your annual revenue.
And it’s probably not a viable option if your business has cash flow issues.
Commercial Real Estate Financing
Because the real estate itself is the collateral, personal credit will not loom quite so large. These loans, much like mortgages, tend to run longer as a matter of course.
Equipment Financing
Much like for commercial real estate funding, equipment loans use the equipment as collateral. This takes some pressure off entrepreneurs to have good credit scores.
Financing with a Business Credit Card from a Starter Vendor
While business credit card providers like American Express and Visa will often want an entrepreneur to have better scores, starter vendors might not.
Using vendor business credit is a proven way to build business credit, even with no preexisting business credit history. Even if an entrepreneur has access to other forms of funding, building business credit is still an excellent way to add value to a business.
Business Lines of Credit
Credit lines can often be a lot like credit cards in how a company can use them. A business line of credit can be renewed, too.
Alternative Lenders
There are many companies (a lot of them are online lenders) who will lend even if you have business partners with bad credit. Their main concern is whether your small business can make its requirement monthly payments.
A business loan from an alternate lender can be a great choice. Many have been in business for years and so yours would not be their first-ever business loan.
How to Dispute Errors on Your Credit Report
Given that the personal credit bureaus may have improperly discarded a number of disputes, it may seem misplaced to add this section at this time.
However, disputing is still a good way to improve a credit score. If nothing else, business owners should dispute any issues on their business credit reports. Removing a blemish on your credit history will always help with getting a business loan.
Also, it’s possible that the House of Representatives (or maybe a lawsuit if it goes that far) would push Experian, Equifax, and TransUnion to pay far better attention to disputes.
In particular, since a number of disputes were rejected in a manner that was perhaps automated, credit reporting agencies may be pressed to improve their algorithms and maybe hire more people to handle the influx of disputes.
How Do You Find These Errors?
Credit repair for business owners always starts with finding the errors and omissions in the first place.
The easiest way to spot errors in your credit history is to monitor your credit. Credit Suite offers monitoring for significantly less than it would cost you at the business credit reporting agencies.
Not monitoring means you would most likely have to spend a lot more time spotting errors.
Seeing as a correct credit report can mean the difference between getting a business loan and not getting a business loan, it is well worth the cost.
Takeaways
Business and personal credit reports are rife with enough errors. But adding inaction on disputes adds insult to injury. No wonder the House of Representatives is on the case.
Fortunately, monitoring helps you spot errors in your reports. Contact us today for far less expensive monitoring and find out what else we can do to help your small business grow.
