Do Small Business loan affect Personal Credit

If a lender runs both credit scores (personal and business) to determine your repayment ability, your personal credit could be affected. A credit check is a ‘hard inquiry’ which can impact your credit score. In fact,multiple hard inquiries can take several points off your score. The solution: select lenders only after thoroughly researching the business loans they have to offer.

What’s the difference between personal and business credit?

A Business credit score relates to the credit worthiness of your company. It gives lenders a good view of your payment history with various suppliers and sub-contractors. This history is built up during the course of day to day business transactions. By analysing your business credit score, lenders can assess your debt to income ratio and credit utilization rate among other aspects.

Personal credit score

On the other hand, your personal credit score provides an overview of your personal finances. The higher the credit score, the better your chances of your business loan application being approved. If you are venturing into business for the first time, lenders will give greater weightage to your personal credit history, particularly credit utilization, and appetite. In other words, how much you owe and how much credit you have taken on.

Is it easy to get a small business loan with a low personal credit score?

It’s certainly possible. Business credit scores are not affected by the same factors as personal credit scores. For example, debt to income ratio would have greater weightage for a small business loan than for, say, a personal loan. The reason: businesses borrow based on cash flow which, in turn, depends on multiple factors like seasonal demand. Secondly, business structures like LLCs protect business owners from personal liability for business debts. So, one can get a small business loan regardless of how bad their personal credit is.

However, a lot depends on the lender’s own credit policy which basically lays out the terms and conditions you would see on the loan agreement. For example, if the lender requires you to provide a personal guarantee on a business loan, your personal credit score could be affected. That said, many non-bank lenders in Australia are generally more flexible when it comes to funding loan applicants with a low personal credit score.

Can a Small Business Loan Improve Your Personal Credit Score?

If you are a sole trader, you can certainly leverage a business loan to improve your personal credit score. This is because small business loans for sole traders are approved based on their personal credit scores. The loan would thus reflect on your personal credit report. With every improvement in your personal credit score, you would also be able to get better terms on business loans.

Tags: Personal and business credit, Business credit score, Personal Credit Score

 

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