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When you’re applying for small business funding, commercial lenders measure your business’s risk and creditworthiness primarily based on your personal and—if you have one—business credit scores. This might lead you to assume that you need good credit in order to get a business loan, but do you actually need a good personal credit score to get a business loan in Canada?
The answer to that question is technically yes, but it’s a soft yes with some caveats. The reality is that there is no universal minimum credit score requirement for a business loan, meaning you don’t necessarily need to have a stellar credit rating in order to get the funding you need.
Ultimately, how good your credit needs to be comes down to the type of funding you’re seeking and the lender you’re working with. For example, government-funded and traditional lenders typically require high credit scores, while alternative lenders put less emphasis on credit score and will consider additional factors, such as the health and potential of your business.
In this post, we’ll take a look at:
While the focus is often on personal credit, lenders will also want to review your business credit score if you have one. So, what is the difference between your personal credit score and your business credit score?
| Personal credit | Business credit | |
|---|---|---|
| Assesses | - How you handle your personal credit obligations | - You business's ability to manage credit responsibilities |
| Scored | - FICO is scored on a scale of 300 - 900 | - Dun and Bradstreet is one of the most common sources for calculating your business credit score, providing a score on a scale of 1 - 100 - The FICO Small Business Scoring Service (SBSS) is also common, with scores ranked between 0 - 300. |
| Based on | - Payment history - Amounts owed - Length of credit history - Type of credit used - New credit applications |
Similar to personal credit, but also includes: - The size of your company - Industry risk factors - Your relationships with vendors |
| Minimum score | - High 600s or low 700s for traditional lenders - Around 550 for alternative lenders |
- Dun and Bradstreet: anything above 75 is considered "good" - For FICO SBSS, the closer it is to 300, the better. Anything below 140 will not be considered by traditional lenders. |
Having a low personal or business credit score doesn’t mean that you won’t be approved for small business funding, but it may mean that you might not be able to get financing from traditional lenders. It may also mean that you get approved for a lower loan amount, shorter term lengths, or with higher rates.
Credit score matters because it is how lenders measure the amount of risk you pose. The lower your personal and/or business credit score, the greater the risk you present to funding providers. As a result, a low credit score can have a significant impact on your ability to get approved for small business funding, as well as your loan terms. While having a low credit score will not necessarily disqualify you from getting funding, your funding options might have higher interest rates, different repayment schedules, and lower loan amounts.
A low credit score isn’t indicative of a weak business and is not necessarily a reflection on you. Younger businesses might not even have a business credit score because they haven’t been operating long enough to build one, and if they do, it can be low simply because it hasn’t had time to build. In these instances, lenders will look exclusively at your personal credit score when assessing risk.
Different types of lenders have different minimum credit score requirements. Traditional lenders are typically strict with minimum credit scores, while alternative lenders offer more flexibility. Let’s take a closer look at these two types of lenders:
Traditional lenders
Alternative lenders
If low credit prevents you from qualifying for traditional lending options such as BDC or bank loans, there are several alternative funding options available to businesses with lower credit scores. Here are four of the most popular options and why they work for businesses with low credit scores:
Available from direct online lenders, merchant cash advances (MCAs) are a non-loan form of financing known as a purchase of future receivables. With MCAs, lenders give you a lump sum in exchange for a percentage of your business’s daily or weekly credit and debit card sales. The percentage they take for payment varies based on how high your sales are, so your payments will be higher on days or weeks when your sales are higher and your payments will be lower on days and weeks when your sales are lower. This makes MCAs especially ideal for businesses that process a high volume of credit card transactions.
Invoice factoring is another non-loan form of financing called an “asset purchase”. With invoice factoring, a factor (aka your lender) buys your outstanding invoices and advances your business their value up to 90%. The factoring company will send you the remaining value when your client pays, minus any fees.
Some local non-profit organizations offer microloans for small projects, with funding amounts as small as $500 up to $10,000.
Equipment financing is designed specifically to fund the purchase of new equipment such as heavy machinery, specialized technology, or store fixtures.
If you have low personal or business credit for any reason, don’t worry—there are still funding options available to you that can help manage unexpected expenses or support your business’s growth. While it may not be easy to access financing through traditional lenders, many alternative lending products exist to help businesses in your position.
As an alternative lender, Greenbox Capital is able to approve more funding for businesses with low credit or bad credit, including merchant cash advances, online invoice factoring, collateral business loans, alternative small business loans, and alternative business credit.
