This is the final post in our credit scores series exploring ways your score can affect your veteran-owned small business, particularly in regards to business funding.
Every small business needs money, but sometimes entrepreneurs take the leap to start a business when they first have their idea or when they think the “timing is right” without fully considering the strength of their financial position and credit score. Before you start looking for small business funding, we recommend you know your credit score. If you’re looking to fund your veteran-owned small business and have a low credit score, it’s worth hesitating long enough to consider some of the financial ramifications of diving into the business loan process before your credit score has improved. That’s why we’re going to delve into how a low credit score can have a direct impact on your veteran business loan.
As you may know, personal FICO credit scores are represented by a three-digit number ranging between 300 and 850. Click here to learn more about what makes up a personal and business credit score. The most important thing to keep in mind with credit scores is that the higher your score the better:
Financial institutions evaluate your creditworthiness by looking at your entire financial situation, and then they assign you a credit score. The lower your score, the more risky you are perceived by lenders.
As a result your loan terms will be much less favorable than if you had a higher score. This is the bank's method for dealing with a ‘riskier’ loan applicant.
Descriptions about established “ranges” of credit scores vary depending on the lender and the ramifications of each range are also subject to change, but to give you an idea, StreetShares uses this scale:
If your score is anything between the “Excellent” and “Good” ranges, you’re most likely going to be approved with very few issues. Once you're in the “Good” to “Fair” range, you might find there are more limitations to your business loan you didn’t encounter in the higher ranges. And once you’re looking at the “Rebuilding” to “Needs Work” range, it’s most likely in your best interest to hunker down and lower your outstanding debts before pursuing a business loan by making full minimum payments, on time, for several months. You’re going to run into several hurdles when trying to secure a loan in the lower ranges. Therefore, it’s best to be patient and allow yourself to get to a better place financially before you move forward with the loan process.
Whether you have a low score according to the chart above or you just have a lower score than you were hoping, we want to point out three ways bad credit can affect your business loan:
1. Whether or Not You Get Approved
The most basic thing to understand is that if your credit score is low enough, your veteran business loan application could be denied at the outset. This is because the lender has decided not to take on the risk associated with offering you a loan based on your current financial picture. Ultimately, they want proof that if they loan you money they will get it back; if your credit score doesn’t shout trustworthiness, or if it suggests significant challenges with repayment, then lenders are going to be hesitant to give you funds in the first place.
That said, if your score is high enough that you are able to get approved, but it is still in the lower ranges, you might be limited on the loan amount you will be able to borrow. Sometimes it’s not just about being able to get approved if you can’t obtain all the funding your small business needs, which brings us to our second point.
2. The Amount of the Loan
If you have a low credit score, you may run into restrictions of how much you are able to borrow. It might not cover the full amount your small business actually needs, and therefore it is imperative you first have a good understanding of the following:
- The specific amount of money you need to borrow
- How the amount you need to borrow compares to the amount that you end up being qualified for
In fact, it may not make sense to complete the loan process if these numbers do not align.
Additionally, this category encompasses the total amount of money that you will pay over the life of the loan once interest and fees are taken into account. It is here where the details of your credit score can have a major impact on your loan. For example, if your interest rate changes by even one percentage point, it could mean the difference of thousands to even tens of thousands of dollars owed over the life of your loan.
As you know, the lower your credit score is, the higher your interest rate is likely to be. This is part of why it is so crucial to take the steps necessary to increase your credit score. Learn how to increase your credit score.
3. The Terms of the Loan Repayment
There’s a lot of fine print when it comes to lending. If you have a lower credit score, it could have an effect on what the fine print entails for your business loan. You may find that your loan offers more restrictions or less favorable terms than you initially thought. Some online lenders even skew the language to make it seem like you’re getting a ‘discount’ on early repayment fees. However, StreetShares doesn’t charge any fees or penalties to pay your loan back early.
For example, with a lower credit score you may have to pay more in fees. You may have a higher interest rate. You might even have to offer some form of collateral against the loan. It may mean that you have a much shorter time span to pay off your loan, resulting in higher monthly payments. These are just some of the examples that could occur due to bad credit.
Learn More about Business Lending from StreetShares
In a world where lending has been traditionally run by slow-moving, impersonal big banks, there are now new options available. StreetShares looks past the out-dated black-and-white lending profiles that big banks use to evaluate your creditworthiness and can offer better financing to meet your small business needs.
Depending on your situation, our business loan offers for veteran small business owners take a few things into account including your credit score. Typically, we work with business owners with a credit score of 600 or higher. StreetShares has financing options fit for many business situations, such as the simple term loan, Patriot Express Line of Credit and government contract financing.