Why is your lender asking about your personal credit score? It’s a reasonable question if you’re looking for a small business loan.
For most small business owners, particularly if you’ve been in business less than five years, your personal credit score is every bit as important as your business credit score. For startups and early-stage businesses who haven’t had a chance to establish a strong business credit profile, your personal credit score will be critical if you need financing to get things moving. The three major credit bureaus that report on your personal credit are Experian, Equifax, and TransUnion and because it’s so easy to see your own credit report, there’s no reason not to make reviewing your credit score a monthly ritual.
In addition to FreeCreditReports.com, which makes it possible to see your credit score for free, for a very minimal fee you can also access all three credit reports via a company like Experian, and get a notification any time something on your report changes. This makes it very easy to see the same thing a lender sees when they look up your credit report. I’m notified via email every time something on my report changes and every time there’s an enquiry, which makes it easy to notice if someone I haven’t authorized is accessing my credit report.
I’m not convinced a personal credit score tells the whole story about a small business borrower, but it does tell a story—often the only story for some small businesses. With that in mind, here’s the story your personal credit score tells a lender when they’re evaluating you for a small business loan:
—Above 800: Excellent—If your personal credit score is above 800, borrowers will likely roll out the red carpet for you—you’ll be offered the best interest rates and most favorable terms.
—720-799: Very Good—You are a low-risk borrower and can go just about anywhere to get a loan. You’ll have no problem at the bank and should expect excellent interest rates and great terms.
—680-719: Good—Many Americans fall within this range. This is considered a good score and should make it possible for a borrower to see more approvals and pretty good interest rates.
—620-679: OK—Most lenders consider this a moderate risk credit score. Although you may be able to find a small business loan, it will likely not be attached to a low interest rate. If this is where your credit score falls, you should expect to pay a moderately high interest rate.
—580-619: Poor—This is considered a high-risk credit score. A borrower in this rage should expect to pay a high interest rate and it’s unlikely you’ll find any luck at the local bank.
—Below 579: Bad—Although there is financing available for borrowers with a credit score in this range (many online lenders are happy to work with borrowers if they have a 500 credit score if other conditions are met), it’s considered a very high-risk score and will probably come with a high interest rate. A traditional loan from a bank or credit union is probably not an option.
Knowing your personal credit score and what the likely scenarios are for getting a small business loan will help you set realistic expectations and focus your search for financing at places you’re likely to find the most success. For example, if my personal credit score were 580 and I’d only been in business for a year or two, I wouldn’t even approach the local bank. I’d look for other options online.
Of course there are always exceptions and there are circumstances when an otherwise good borrower might have a less-than-perfect credit score. If this is you, every lender will want to know why your score is low. In reality, most lenders simply want to know that you have the ability to repay a loan and that you’re likely to do it. One lender once told me, “Credit score is really just a reflection of a borrower’s willingness to meet their financial obligations.”
At OnDeck, we’re convinced there’s a lot more to a small business owner than his or her personal credit score. That’s why, in addition to credit score, we look at things like cash flow, trade information, the type of business you’re in, as well as other financial and non-financial information about your business—we even look at things like social media to get a more complete picture of your business. In fact, many of those other metrics mean more to us than your credit score. The bank around the corner just doesn’t have the technical ability to look at more than your credit score, so they don’t.
Nevertheless, every lender is going to look at your personal credit score. Some of them are going to make decisions about you and your business based only upon the story it tells. That might be an oversimplification, but it’s how most lenders see your business. What does your score say about you?