If your PPP loan application was denied because of credit issues, you weren’t alone. We’ve spoken to a number of business owners who had their application declined because their credit score was too low. Because the SBA didn’t provide a minimum credit score requirement for the PPP, it surprised some borrowers that their credit profile mattered when applying for a PPP loan. Based upon guidelines from the SBA, it kind of surprised us too, but not completely.
As Part of the 7(a) Loan Program, Did that Make a Difference?
Although there didn’t appear to be a required credit check for a PPP loan (at least it wasn’t spelled out in the legislation), it was somewhat surprising because there is a credit check required for all 7(a) loans. The SBA’s 7(a) program is where these loans technically reside. A 7(a) loan requires what the SBA calls “acceptable” credit. For 7(a) loans of $350,000 or less, applicants are typically prescreened using the FICO SBSS credit score, which can take into account both your personal credit score and your business credit profile.
It didn’t appear that all lenders were screening for acceptable credit, but it shouldn’t have been a surprise that some lenders did. Let me explain why.
The PPP May Be Forgivable, But It’s Still a Loan
Because there is the possibility of forgiveness for a PPP loan, it makes sense that the assumption may have been, “No Credit Check Required.” And while small businesses have the option to apply for forgiveness with their lender, any of the balance that isn’t forgiven will become a 2-year loan at 1% interest guaranteed by the SBA.
Although lender due diligence requirements were relaxed for the PPP, lenders still had responsibility to:
- Confirm the receipt of the required borrower certifications
- Confirm receipt of information demonstrating that a borrower had employees for whom the borrower paid salaries and payroll taxes on or around February 15, 2020
- Confirm the dollar amount of average monthly payroll costs for the preceding calendar year by reviewing the payroll documentation submitted with the borrower’s application.
As a lender typically working with the 7(a) loan program, it makes sense that part of confirming the receipt of the required borrower certifications could also have been interpreted to include the normal credit check required for every SBA-guaranteed loan of this type—usually a FICO SBSS score of around 140.
The EIDL loan distributed by the SBA explicitly identified that there would a check for “acceptable” credit.
Your Credit Profile Mattered When Applying for a PPP Loan and it Still Does
Regardless of whether or not the SBA lender that processed your PPP loan application checked your credit profile, you should expect they likely will with any future coronavirus funding that might come down the pike. Lenders have a fiduciary responsibility, in this case to the SBA and the federal government, to mitigate the risk of borrower default as much as possible. Your credit profile is a metric they use to try to determine how you and your business will treat debt in the future based upon what you have done in the past.
Of course, I neither work for the SBA nor do I have clairvoyance into what they may or may not do in the future, but it makes sense to me, based upon the way business financing has worked in the past and what some applying for a PPP loan over the last couple of months experienced this year, that the stronger your credit profile the better the odds of successfully securing borrowed capital—in the form of an SBA-guaranteed loan or any other type of financing.
Take a Strategic Approach to Personal and Business Credit Management
If you were declined a PPP loan because of either your personal credit score or your business credit profile, there are things you can do to improve both—regardless of whether Congress puts forward another aid bill or you will need to turn to commercial financing to support your business.
My grandmother used to say, “How do you know where you’re going if you don’t know where you are?”
The same is true for building a strong personal and business credit foundation. Before you can positively influence your credit profile you need to understand where your personal credit score and your business credit profile are right now.
It All Starts with Credit Monitoring
It’s human nature to impact the things we pay the most attention to. The Spanish philosopher Jose Ortega y Gassett said, “Tell me to what you pay attention and I will tell you who you are.”
One of my best friends is a CPA. Several years ago, as a younger entrepreneurial version of myself, we used to discuss my business at the time, what I was doing, and what I wasn’t doing. He did his best to help me understand the importance of what I called at the time, “accounting mumbo-jumbo,” but I was destined to learn the hard way. Fortunately, I did, but I shudder to think of what the things I was, and wasn’t, paying attention to said about who I was.
About four years ago, Nav did a wonderful study on this very topic—the American Dream Gap Report. I wasn’t working with Nav at the time, but I thought the insight offered by the report was incredibly valuable. Nav’s co-founder and current Chairman of the Board said at the time the report was released:
“I interact with a variety of small business owners daily, from tech start-ups to local restaurant owners. Many have a decent understanding of personal credit, but very few know how business credit works, or that it even exists. What we did find through the research is that those who do understand and actively manage their business credit score and finances find the funding process easier to navigate and are more optimistic about potential growth. This understanding empowers small businesses and will help them grow and thrive.”
The study revealed that:
- 45% of small business owners who are denied financing get turned down more than once and 23% don’t know why their applications were denied.
- Small business owners who understand their business credit scores are 41% more likely to be approved when they apply for a business loan.
- Those who understand their business credit profile are also 31% more likely to consider expanding their business.
- Yet, 45% of small business owners don’t know they have a business credit score and 82% don’t know how to interpret their score.
These numbers blew my mind at the time and are every bit as relevant today as they were then. Prior to this study, I would recommend that a business owner review their credit profile every quarter—at least a couple of times a year. After reading this report, I now suggest that a monthly review is not too frequent.
I can’t think of a business owner seeking financing, whether it’s something like the PPP, a business credit card, or any other small business loan, that wouldn’t want to improve the odds of a successful application by 41%. Can you?
Monitoring Your Credit is Easy and Can Be Free
I’ve been monitoring my personal credit score with Experian for several years. I pay a monthly fee for regular updates and am flagged any time there is an update to my profile. It’s a lot easier now than when I started doing this.
You can view your business credit profile and personal credit score for free at Nav. As a small business owner, your personal credit score will likely always be part of any business loan creditworthiness decision along with your business credit profile. Nav makes it really easy to keep track of both.
As you navigate the morass of challenges your business faces resulting from the crisis caused by COVID-19, don’t put off paying attention to your credit profiles. It’s one of the most important assets your business has. Although there is no quick fix if your current credit situation is less-than-perfect, you might be surprised at how much you can influence things for the better by regularly monitoring and leveraging the good credit practices you can learn more about here.
Please keep in mind this information is changing rapidly and is based on our current understanding of the programs. It can and likely will change. Although we will be monitoring and updating this as new information becomes available, please do not rely solely on this for your financial decisions. We encourage you to consult with your lawyers, CPAs and Financial Advisors. To review your real-time funding options with one of Nav’s lending experts, please contact us.
This article was originally written on May 7, 2020 and updated on November 12, 2020.