5 Small Business Loans and their Required Credit Scores

Small Business Loans and credit scores

Business expansion requires new access to working capital. But unfortunately, not every business owner can sufficiently finance new product lines, workspace, office necessities, and other assets that keep business operations running. That’s where small business loans come in. 

The credit score plays a crucial role in any underwriting process. It typically aids lenders in assessing a borrower’s creditworthiness. A company’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 revenue. In that 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 the types of Loans that allow businesses to borrow a lump sum with an agreed schedule for repayment. They’re issued by conventional lending institutions like credit unions and local or commercial banks. 

Eligible applicants can enjoy desirable terms like high capital (for commercial banks), lower interest rates, and longer repayment terms. However, lenders of term loans usually have stringent application processes. They’re more into companies with steady profitability, high annual revenue, longer age of business, and a stellar credit score. 

Lenders take a huge leap of faith when accepting borrowers’ 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 700 will be better. 

Equipment Loan

As its name implies, 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 kind of loan. 

The thing is, an equipment loan is collateralized. If you fail to repay your contribution, the lenders will seize your stuff and may resell them to others. On a positive note, lenders are usually lenient about a borrower’s credit score for an equipment loan. A minimum credit score of 600 can already make you qualified for this work. 

Also, it’s important to note that the other terms of an equipment loan will depend on the product you’re planning to purchase. For example, a product’s lifespan, industry, or universality can have a say on your loan terms. 

Accounts Receivable (AR) Financing

Another type of collateralized loan is invoice or accounts receivable (AR) financing. It’s a kind of loan that allows you to finance your business’s outstanding invoices through a cash advance. 

Lenders typically don’t mind a borrower’s credit score for AR financing as much as they would for other loan types. However, it’s the invoice (the client or customer’s payment) that the lenders in AR financing will collateralize, so the onus is on the borrower’s clients or customers. 

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

Online Short-Term Loans 

A short-term loan might be the way to go if you’re looking for a faster turnaround time on financing with lower credit score requirements. Online lenders have streamlined the short-term loan application process and subsided the eligibility requirements for individuals and businesses. 

Short-term loans have relatively lower risk than other financing options because they usually offer capital of as low as £5,000 for a repayment period of 3-12 months only. Conversely, other lenders offer up to £500,000 or more. Plus, most short-term business loan lenders offer flexible repayment plans to match the cash flow of the borrowers’ businesses. 

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’s an alternative business finance product that provides quick lump-sum advances in exchange for a percentage of your business’s future sales or future credit and debit card income. 

The borrowing amount depends on a business’s annual sales. When it comes to the repayment process, borrowers get a factor rate instead of interest rates. Hence, businesses must multiply their merchant cash advance by the factor rate to know how much they’ll pay. On a positive note, merchant cash advance turnaround can be as fast as a week. 

Final Thoughts 

In a nutshell, the higher your credit score, the lower the interest rate. Other lenders may also lessen their required down payment if you have a high credit score. 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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