Will a personal or business credit check be required for EIDL or PPP loans?

On December 22, 2020 Congress passed the stimulus bill which includes new EIDL grants, new Paycheck Protection Program loans and other small business relief. Read more about that legislation and apply for a new PPP loan here.

For small business owners hoping to get a COVID relief loan through the Economic Injury Disaster Loan (EIDL program) or Paycheck Protection Program (PPP), a credit check is both dreaded and anticipated. Some worry that a credit check will reveal credit problems that may prevent them from getting approved for the small business funding they desperately need. Others are excited when they see a credit check from the SBA appear on their credit reports as they take it as a sign their application is moving forward. 

Here we explain what to expect from a credit check for these suddenly very popular loans. 

EIDL credit checks

As we explained in our article, FAQs about EIDLs, acceptable credit is a requirement for these disaster loans. There will be a personal credit check for all applicants, plus a business credit check for all applicants except sole proprietors for loan amounts above $200,000. If you are applying for one of these loans it’s a good idea to review your credit reports so that you can prepare an explanation for any past credit problems to provide to your SBA case manager. Personal credit checks for these loans go through Experian, so it’s a good idea to review your Experian credit report. The inquiry appears as “US SM BUS ADMIN ODA” on the credit report. Business credit checks go through Dun & Bradstreet. 

You can review your personal Experian credit report and D&B business credit with a free Nav account. Checking and monitoring your credit through Nav does not impact your credit scores. All inquiries from Nav are soft inquiries, and therefore are not provided to lenders or used in calculating credit scores. 

One source of confusion seems to be why credit is checked for these loans, especially in a nationwide disaster like that caused by coronavirus. The answer is fairly straightforward: if an SBA loan isn’t repaid, taxpayers are ultimately on the hook. Credit checks are traditionally a way to spot borrowers who are more likely to default, and that’s true of disaster loans as well. 

Note that even if you are turned down for an EIDL due to credit concerns, you can still keep any advance/grant of up to $10,000 you received.

PPP credit checks

There does not appear to be any credit check required for PPP loans. That’s somewhat surprising because these loans technically fall under the SBA 7(a) loan program, which typically does require acceptable credit. In fact, 7(a) loans for $350,000 or less normally require the application to be prescreened using the FICO SBSS credit score, which can take into account both personal and business credit. However, when you think about the fact that PPP is designed primarily to be a loan that will be completely forgiven, it makes sense that good credit isn’t required. 

It does not appear most lenders are checking credit for these loans. However, several  people in the Nav CARES Act Facebook Hub have reported their  credit has been checked for PPP loans, or that they were denied for PPP based on credit. Generally lenders are allowed to add their own requirements to SBA loans as long as they don’t discriminate on a prohibited basis.

It’s also possible they could check credit to verify an applicant’s identity. An increasing number of lenders are providing these loans to non-customers and will need to try to prevent fraud. But in that case, the lender could use a “soft” credit check which we discuss below. 

Keep in mind that if the credit check appears on your credit reports from the SBA, it will be for an EIDL as those loans come directly from the SBA. If a lender checks credit for a PPP loan application, the lender’s name will be associated with the inquiry, not the SBA. 

Inquiries and your credit scores

Here’s a quick refresher on inquiries and how they impact your credit: 

1. An inquiry simply indicates that someone has checked your credit. It does not state whether you were approved or denied for credit.
2. An inquiry may be a “soft” inquiry which doesn’t impact your credit scores, or a “hard” inquiry which may. You see all inquiries on your reports, but lenders won’t see soft inquiries. Applications for loans fall under the hard inquiry category, though some creditors do use soft credit pulls in the context of business credit applications. 
3. An inquiry will appear only on the credit report accessed for the transaction and usually that’s one credit report from either Equifax, Experian or TransUnion. In the case of EIDL inquiries, it appears the SBA is accessing personal credit reports from Experian.
4. A single inquiry usually drops the credit score by roughly 3-7 points. The impact often levels off over the course of the following months as long as new inquiries don’t continue to wrack up. 
5. Inquiries generally impact credit scores for six months to a year. After two years they are removed from the credit report. 
6. Certain types of inquiries in a short period of time may be grouped and counted as one, including mortgage, auto and student loan-related inquiries. The exact time period varies depending on which credit scoring model is used. 

In general, inquiries should not be a major concern or issue for individuals applying for COVID relief loans. However, if you have past credit problems and apply for these loans, you will want to review your credit reports in advance.