5 Small Business Loans and Their Required Credit Scores

Business expansion requires new access to working capital. But unfortunately, not all business owners can fund enough new product lines, workspace, office supplies, and other assets that keep the business running. This is where small business loans come in.

Credit score plays a crucial role in any underwriting process. It generally helps lenders assess a borrower’s creditworthiness. A business’s eligibility for a small business loan is assessed on a case-by-case basis.

But suppose borrowers have met or even exceeded a lender’s standard loan requirements, such as annual income. In this case, they should aim for minimum credit scores to be eligible for different small business loans. Check them here:

Term loans

Term loans are one of types of loans which allow companies to borrow a lump sum with an agreed repayment schedule. They are issued by conventional credit institutions such as credit unions and local or commercial banks.

Eligible applicants can benefit from desirable conditions such as high capital (for commercial banks), lower interest rates and longer repayment terms. However, term loan lenders generally have rigorous application processes. They prefer companies with stable profitability, high annual revenues, a longer operating age and an exceptional credit rating.

Lenders take a huge leap of faith when accepting borrower applications, so they usually take their time to assess your creditworthiness. Most of the time, a credit score of 650 is already enough for them, but a score of 700 will be better.

Equipment loan

As the name suggests, a business equipment loan finances computers, machinery, vehicles, or other things you need to run your business. They don’t have many strict qualifications, so you can easily get approved with this type of loan.

The thing is, an equipment loan is guaranteed. If you don’t repay your contribution, lenders will seize your business and may resell it to others. On a positive note, lenders are generally lenient about a borrower’s credit rating for an equipment loan. A minimum credit score of 600 can already qualify you for this job.

Also, it is important to note that the other terms of an equipment loan will depend on the product you plan to purchase. For example, the lifespan, industry or universality of a product may have a say in the terms of your loan.

Accounts Receivable (AR) Funding

Another type of secured loan is invoice or accounts receivable (AR) financing. It is a type of loan that allows you to finance your business’s unpaid bills with a cash advance.

Lenders generally don’t care as much about a borrower’s credit rating for AR financing as they do for other types of loans. However, it is the invoice (the customer or the customer’s payment) that the lenders in AR financing are going to guarantee, so the liability lies with the customers or clients of the borrower.

As a borrower, you don’t have much access to your loan capital compared to other types of loans. Generally, the term varies from lender to lender, but if your creditworthiness is a key aspect of an invoice finance loan, you should have at least a 600 credit score.

Short term loans online

A short term loan could be the answer if you are looking for faster financing with lower credit score requirements. Online lenders have simplified the short-term loan application process and relaxed eligibility criteria for individuals and businesses.

Short-term loans are relatively lower risk than other finance options as they typically offer principal as low as £5,000 for a repayment period of just 3-12 months. Conversely, other lenders offer up to £500,000 or more. Additionally, most commercial short-term lenders offer flexible repayment plans to match borrowers’ business cash flows.

Merchant Cash Advance (MCA)

A Merchant Cash Advance has been a recent favorite for UK business owners, especially those who rely on credit or debit card sales. It is an alternative business financing product that provides quick lump sum advances in exchange for a percentage of your business’s future sales or future credit and debit card revenue.

The amount of the loan depends on the annual sales of a business. Regarding the repayment process, borrowers get a factor rate instead of interest rate. Therefore, businesses must multiply their cash advance by the factor rate to find out how much they will pay. On a positive note, the turnaround time for merchant cash advances can be as fast as a week.

Final Thoughts

In a nutshell, the more your credit score, the lower the interest rate. Other lenders may also lower their required down payment if you have a high credit rating. That’s why it’s recommended not to settle for loans that require a low credit score, especially if you want to pay lower interest rates and down payment.

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