By Gerri Detweiler of Nav
The U.S. Small Business Administration is reporting record loan volume for SBA loans, including its popular 7(a) loan program. Backed by federal guarantees, these loans offer attractive terms. But many applicants won’t qualify for a variety of reasons, and one of them is a little-known number that can make or break an application: the FICO LiquidCredit SBSS score.
(Photo courtesy of Gerri Detweiler)
FICO SBSS small business credit scores are used to prescreen loans for less than $350,000 under the 7(a) program. A minimum score of 140 is needed to pass the initial screening, and many SBA lenders are looking for scores of 160 or higher. (The lowest, score, by the way, is 0 and the highest is 300. Just like personal scores, a higher number is better because it is associated with lower risk.)
Lenders may also use these scores for non-SBA loans up to $1 million, and many do. FICO says these scores are used by over 7500 lenders.
It’s not just the credit score range that makes these business scores quite different from personal credit scores. They can take into account a broader range of information that includes personal credit data about the principal(s) of the business (anyone owning 20 percent or more of the business), as well as data about the business itself.
Most people know that when it comes to achieving high personal credit scores you need to pay bills on time and keep debt levels low, especially on revolving accounts like credit cards. Business credit scores look at payment history and debt, too, but may also consider other factors such as experience (time as current owner of the business) and financial data.
When it comes to payments on commercial accounts, information about how these accounts have been paid in the past is more granular than what we have come to expect on personal credit cards and loans. Personal loans and credit cards aren’t usually reported as late unless you are 30 days behind. Business accounts, however, are often reported based on “Days Beyond Term” or DBT. If you pay one of these accounts 16 days after the due date you are sixteen days late (16DBT) and that can hurt your business credit rating. Paying early can also help you earn a higher score under some models.
A FICO SBSS score (which, like any FICO score can be customized to an individual lender’s needs and experience) may also incorporate information provided on the application such as amount of funds in the company’s checking and savings accounts, combined net worth of owners, sales volume, number of employees and industry type. Business financials including cash-to-assets ratio, current ratio and EBIT-to-interest ratio may be evaluated.
Businesses that haven’t established credit in the name of the business will find it difficult to earn a sufficient score to pass this screening, though it may be possible if the owner has excellent personal credit and financials are strong. Still, it’s a reminder that establishing accounts with lenders and vendors that report information to D&B, Experian and the Small Business Financial Exchange is essential, and a step to take before you need to borrow. Establishing credit is not an overnight process.
Currently, Nav offers the only way to check your FICO SBSS score before you apply. If yours isn’t strong enough, you may need to consider alternative sources for financing while you work to improve your personal and business credit scores.
Gerri Detweiler is head of market education for Nav, which helps small business owners monitor and build strong personal and business credit, and create financially healthy companies. She is also co-author of a new book, Finance Your Own Business.
The views, opinions and positions expressed within this guest post are those of the authors alone and do not represent those of CBS Small Business Pulse or the CBS Corporation. The accuracy, completeness and validity of any statements made within this article are verified solely by the authors.