Your Business Credit Score Can Impact Funding Terms

Good business credit can help you qualify for more credit at lower rates and have a positive effect on your repayment terms.

Lenders consider a number of factors before deciding whether to help fund your business needs. Amongst these factors, they may consider how well your business repays its debts. This is where a business credit score comes into play.

As a general rule, a higher business credit score indicates to lenders that your business is a more trustworthy borrower. If your business has solid scores, it will have a higher likelihood of getting approved for financing, it can help you access more credit at lower rates and have a positive effect on your repayment terms. Here are five ways having a good credit score can help you when applying for financing.

Higher Likelihood of Approval

Business owners with solid business credit scores have a greater chance of getting approved for financing. You might not know about this because, unlike personal credit, lenders aren’t required to notify you that they have made an inquiry into your business credit when you apply.

Businesses applying to the Small Business Administration’s (SBA) most popular loan, the 7(a) loan program, are required to go through a business credit pre-screen if applying for a loan of up to $350,000. This involves checking the business’s FICO, LiquidCredit, Small Business Scoring Service score, or FICO SBSS score. The FICO SBSS score ranges from 0 to 300, and the minimum score to pass the SBA’s pre-screen is currently 140. Most banks and 7(a) lenders, however, require a 160 or higher.

Lower Rates

Even a slightly lower annual percentage rate (APR) can make a huge difference in the cost of a business loan or line of credit, so having a good business credit score can help even if the effect on your loan interest rate is marginal.

Imagine a business with low credit scores qualifies for a $200,000 business loan with a 12-month repayment period at 20% APR. If that business had a credit score high enough to help shave just 2% off that APR, they’d save over $2,000 on the total cost of the loan.

 

Better Repayment Terms

Obtaining a good business credit score before applying for business financing is particularly important for businesses that struggle to maintain a consistent monthly cash flow, because some lenders will offer longer repayment periods to businesses that can show they successfully repay their debts.

Let’s take our $200,000, 12-month term loan example from above. If the credit score of the business in question was good enough to help it qualify for a longer repayment term on that loan, say an 18-month term instead of a 12-month term, they would be responsible for paying back less than $13,000 per month rather than over $18,000 per month.

Higher Amounts

If you’re looking to finance a big purchase or large project, you’ll want to get your business credit in shape before applying for financing. Businesses with solid credit scores may be able to qualify for higher lines of credit or loan amounts—if lenders see that your business successfully pays back debts already, they’re more likely to lend you more cash.

Wider Variety of Financing Options

Having a solid score can help businesses qualify for another, less talked about type of financing that many businesses don’t realize are available to them: trade credit.

If you work with vendors or suppliers and have maintained solid relationships with them, they may be willing to extend you “terms.” For example, net-30 terms give you 30 days after the invoice to pay, while net-90 terms give you 90 days. This is actually the most common type of financing used by businesses and it can improve your business’s cash management should you qualify. Vendors and suppliers may look into your D&B PAYDEX score before extending this form of credit.

Not all lenders are going to look at your business credit scores, but because you may not know when your scores will come into question, it’s a good idea to keep them in good shape. Different lenders look at different scores, so it helps to know how multiple scores rate your credit before you start searching for financing.