The 7(a) loan program through the Small Business Administration (SBA) was created to provide access to capital for US small businesses who may otherwise have challenges in obtaining a loan. Traditional banks – where you might seek capital if not through the SBA – typically require exceptional business and personal credit scores and have high standards for capital, cash flow (i.e., very high net income or earnings before interest, taxes, depreciation, and amortization (EBITDA)), and collateral. All these standards are further elevated if the economy is in a credit-tightening cycle like it is now.
While SBA 7(a) loans do have minimum credit requirements, they are typically lower than what traditional banks would require to qualify for funding. Certain factors have an outsized impact on your chances of getting approved for a 7(a) loan. One of the top ways to boost your likelihood of approval for a 7(a) loan is to improve your credit scores – and particularly, your personal credit score as the owner of the business.
How to improve your credit scores to get approved for a 7(a) loan
When applying for a business loan, lenders will look at your credit scores (both business and personal) to determine whether you and your company are good candidates for the loan. Your business score is highly correlated with your personal credit as the business owner. So, improving your personal credit score can be short cut to improving your business credit score, which is often a bit less transparent.
There are different types of personal credit scores, but the 300-850 scale is commonly used for FICO scores and VantageScores. As with business credit scores, higher is better and tells the lender you are a lower risk borrower.
Personal credit score
- 300-629: Bad
- 630-689: Fair
- 690-719: Good
- 720-850: Excellent
Business credit score
- 0-154: High risk
- 155-169: Moderate risk
- 170+: Lower risk
Credit reports can help lenders understand things like: Are you trustworthy? Are you capable of paying the loan back on time? Are there any past debts you’ve paid off to show you’ll be a good borrower? Do you generally pay your bills on time?
These questions (and others) can be answered by analyzing your business and personal credit reports and scores. Before you apply for a 7(a) loan, be sure to look over your credit reports, dispute any errors, and spot any negative activity that you might be able to fix.
If you don’t have much business or personal credit history, you might need to take the time to build that up before applying for a loan. Not all lenders will take personal credit into consideration, but the SBA has strict requirements, so it’s good to assume you’ll need a solid personal score.
A general rule of thumb is that a score of around 650 or higher will drastically improve your chance of being approved. In some cases, you may be approved for a lower loan amount than you are seeking if you are unable to meet the “Good” credit threshold noted in the table above. If your credit score is on the lower-end of the “Fair” threshold, it may be difficult to secure a loan for your business until your score is improved.
The good news is there are many well-known ways to improve both your business and personal credit scores.
How to improve your business credit score
- Update credit information with the three commercial credit bureaus: Dun & Bradstreet, Equifax, and Experian
- Streamline the process of paying bills and make payments on time
- Keep your debts low
- Increase your credit limits
- Maintain a low credit utilization ratio (under 30%)
- Consider debt consolidation
- Review your reports frequently and dispute any issues
How to improve your personal credit score
- Make payments on time
- Increase your credit limits
- Try to maintain a credit utilization ratio (how much debt you hold, such as credit card debt, compared to your aggregate credit limits) of 30% or below (lower is better)
- Keep credit accounts open unless there’s a compelling reason to close them
- Avoid applying for multiple credit cards in a short period of time
- Review your reports frequently and dispute any issues
More ways to boost your chances of 7(a) loan approval
Beyond improving your credit scores, there are a number of other factors that can impact your approval for a 7(a) loan from the SBA:
- Build a polished business plan
- Clean up your bookkeeping and implement new software if needed
- Reduce your debt-to-income ratio
- Boost revenue and daily bank balance as much as possible before applying
- Review online presence (including reviews) to ensure everything looks professional
- Do your research on the lender and types of business loans available to you
- Ensure your revenue and years in business meet the eligibility requirements
- Choose the right lender
There are many lenders out there who service 7(a) loans, but none are more focused on the success of your business than NEWITY. Directly within your NEWITY member portal, you can apply for an SBA 7(a) loan up to $500,000 in less than 30 minutes.
Have questions before you get started? Connect with NEWITY to see how a 7(a) working capital loan can help your business thrive in the years to come.