How Do I Get an SBA 7(a) Loan with Bad Credit?

 Bad Credit SBA 7(a) loans

Bad credit is the bane of all business endeavors, and if you're hoping to get a business loan, it makes sense that you're concerned with your creditworthiness! When it comes to each of the SBA 7(a) loan options, the SBA doesn’t set specific guidelines for a business owner’s credit scores. However, individual lenders will have their own guidelines on creditworthiness and borrower eligibility. Across the board, these seem to be true:

  • New business owners may need high credit scores to qualify.
  • Established business owners may be able to qualify with a lower score. 
  • Lenders may check your personal credit score, business credit score, or both. 

Because most traditional lenders will require a personal credit score of around 700, having a bad credit score can stop you from getting an SBA 7(a) loan. If you want to get a government-backed loan, you need to first build your credit into a good shape.

How to Build Personal Credit

There are many ways to build personal credit, even if your credit is tanked from previous debts or periods of financial hardship. Building credit is a long process, but one that you must undertake in order to receive government-backed loans. Here are a few ways you can build your credit:

  • Secured credit card. Some financial institutions offer secured credit cards that allow persons with bad or no credit to start building good credit. The primary differences between a standard credit or debit card is that you must provide a security deposit, which then typically becomes your line of credit amount, and that you must have a qualifying credit score lower than usual for a credit card.
  • Find a co-signer. Most loans and credit cards allow for an additional party to be held responsible for the debt. In the case of default by the borrower, the co-signer is then held responsible for the balance. This reduces the risk of default for lenders, which makes them more apt to approve a loan to someone with bad credit. A co-signer must have a good credit score themselves, as well as stable income and long-term credit history.
  • Share an account. Most banks and credit card companies allow primary account holders with good credit to add an authorized user to their account. The authorized user becomes responsible for payments, and builds credit in their name. Opening a joint account is another way to share in the benefits of having a primary account holder with good credit.

When you are building your credit, you want to avoid having too many accounts open at once. Focus on making full payments on time to one, possibly two primary credit sources. Timely payments, and payments that clear balances, will slowly improve your credit score. Those one or two initial accounts will eventually become worth a lot for your credit score -- the longer an account is open and in good standing, the better it looks on your credit report. To get a copy of your credit report, start at annualcreditreport.com, which is the only free portal that takes you to the three main credit reporting bureaus (Transunion, Equifax, and Experian).

What’s the difference between a business credit score and a personal credit score?

A business credit score is different from your personal credit score, but is treated similarly by lenders. Your business credit score is based primarily on how you pay your bills, how much debt your business has, and the industry that your business is in. Note that your business credit score is tied to a business through an Employer Identification Number (EIN). In order to establish credit separate from personal credit, an entrepreneur or small business owner must have an EIN.

Building Better Business Credit

Just like a personal credit score, you've got to use credit to build credit. One of the best ways to build business credit is to apply for a small loan like the SBA 7(a) or SBA Small Loan. A business owner can also open a specific business bank account that is used for all financial transaction related to the business. 

If your business has a good relationship with vendors, you can request lines of credit on goods or services. Paying the vendors out slowly will build credit for your business. Similarly, you can apply for a business credit card and make small business purchases with it. If you have poor or no personal credit, financial institutions are likely to allow a very limited line of credit initially. 

Over time, you can build your business credit just like your personal credit. It takes time, but to obtain loans that really pack a punch, you’ll need a solid business credit score.

How to Apply for an EIN

The IRS uses your EIN for tax purposes, and nearly every business entity needs one. Sole proprietorships and individuals are not exempt from needing an EIN, either. Corporations, partnerships, LLCs, non-profits, and pretty much everyone else needs an EIN.

If you think you may need an EIN, consider first if you must pay business taxes. If so, you need an EIN. Also, if you pay one or more employees, have a business bank account, start a business line of credit, or form some sort of corporation, LLC, or partnership, you need an EIN. The IRS also specifies that you must have an EIN if you bid for a contract owned by the federal government.

A business can fill out an SS-4 form to apply for an EIN, which may best suit certain operations. The IRS also provides a form to apply for an EIN online. The online application is an interview-style process that is only available during certain hours. Check the IRS website for more details about applying for an EIN online and the SS-4 form.

Financial Best Practices to Keep Good Credit

Once your credit is damaged, it can take years to repair it. Instead of letting your credit get into a bad way, follow these best practices:

  • Build a budget. It sounds simple, but many business owners struggle with budgeting. Write up a plan of how much you earn, spend, and save, and then record things diligently. Keeping good records of finances will help when you approach a lender about an SBA 7(a) loan, as well.
  • Know your debt. The Consumer Financial Protection Bureau (CFPB) recommends keeping your debt-to-income ratio below 43% in order to prevent stretching yourself into financial failure.
  • Don’t open too many accounts. Credit corporations consider the time period in which you open lines of credit. If you start too many accounts in a short period, it can be a sign of risk of financial failure and can increase your debt-to-income ratio.
  • Make your payments. One of the best ways to keep your credit in good shape is to make payments on time and for the full payment amount. Each time you do this, you are building good credit and avoiding the potential years of negative consequences of bad credit.

Work towards good credit with these best practices, keep it that way, and you'll see results.

Who qualifies for an SBA 7(a) loan?

The SBA sets specific requirements for the SBA 7(a) loan program, most of which are simple and easily met. Since the SBA doesn’t lend money to business owners directly, eligibility is designed to encourage lenders to approve small businesses by minimizing the risk of default.

  • In order to meet the SBA requirements for the 7(a) loan, a business must operate for profit -- non-profit organizations are not eligible to receive funds from the 7(a).
  • The owner of the business must not be on parole, and the business must operate in the United States or one of its territories. 
  • Another requirement is that a business owner must seek out any alternative financial sources before turning to the SBA for a loan. That means if you have the ability to receive a personal loan, you must first go that route before the SBA will consider you eligible for a 7(a) loan.
  • Certain industries are also prohibited from receiving an SBA 7(a) loan. Speculative industries like oil wildcatting are ineligible, as are businesses that earn more than a third of their gross annual income from gambling. Government-owned businesses, religious institutions, non-profits, and some others are also ineligible.

If you're interested in the SBA 7(a) loan but not sure if you qualify, our team at SBA7a.loans offers free consultations to business owners just like you. Contact SBA7a.loans now to make your free appointment and get on your way to funding your venture.


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