Personal credit scores can impact a small business loan either positively or negatively depending on if your score is good or not, how long your company has been in business, and if a personal guarantee is required to get approved. This is because your personal credit score is a sign of financial responsibility and can be used when your company has not been around for a long time or does not have enough assets for collateral.
Not every lender will use or look at your personal credit score when you apply for a business loan. Some will look at your business credit score. However, when you have a good personal credit score, it could help you get favorable terms like a lower interest rate or a reduced deposit.
Here are five ways a personal credit score can affect a small business loan. In the event your score is on the lower side, we also provide some tips on ways you can offset this score and still potentially get approved for financing.
Being Considered a Higher or Lower Risk
When your personal credit score is required as part of the business loan application process, a strong credit score of 740 or higher will be a confidence builder for the lender and may help you get approved if your business finances are not so great. Some industries like real estate investing will carry rolling debt, and that can impact business credit scores.
If you’re able to show financial responsibility in your personal life, as well as demonstrate how your intended use of the loan will lead to profit for your business, this can help you get approved for a business loan.
If your personal credit score has a poor rating below 580, this can have the opposite effect, and you may get declined for a business loan or need to put extra collateral down to get approved. Poor personal credit scores may make the lender feel that you present a higher risk of defaulting on payments, so the added collateral is an assurance that they can recover their money if you default.
When You Don’t Have a Separate Business Bank Account
A lot of entrepreneurs and solopreneurs do not separate their personal and business accounts, especially if they have not formed an LLC or created an entity. When personal and business assets and expenses are combined, it makes it hard for a lender to know how profitable or high-risk the business is.
When they cannot easily separate business and personal assets, they’ll need your personal credit score as part of the loan application process. You’ll also likely be making a personal guarantee because your business assets are combined with your personal assets.
Pro-tip: You’ll need to form an entity and get an EIN number to get a business bank account. From there, you’ll be able to build a business credit score and help offset the need for your personal credit score in the small business loan application process.
If Your Company Is New or a Start-up
When your company is new (less than a year old) and doesn’t have a track record, a personal credit score may help prove your financial responsibility so you can get a startup loan. The same goes if your company does not have assets that are fully owned, like machinery or property for collateral.
We all start somewhere, but when you don’t have assets to leverage, your personal credit score could be the deciding factor in getting approved.
The Interest Rate May Get Lowered
Interest rates can go up or down based on how well you demonstrate your creditworthiness. If everything looks good on your business loan application but the lender comes back with a rate that seems higher than normal, you can provide more info to hopefully get the rate down.
Anything you can do to show you are financially trustworthy will help. A strong-to-perfect personal credit score is one of the things you can provide to make lenders want you as a borrower. If they only used your business financials when you applied, see if your personal credit score and a guarantee may get the interest rate down.
Qualify for Larger Amounts of Funding
If you need a large amount of funding but your business has not been around long enough or you don’t have a strong enough track record yet, a strong personal credit score may build the lender’s confidence to increase the amount of money you can borrow.
Personal credit scores show financial stability and responsibility, so lenders may use them when you apply for a business loan if your company has not been around long enough, when you don’t have enough assets for collateral, or just as an extra data point to do a risk assessment so you can get a small business loan. If you have a strong personal credit score, you may also qualify for larger amounts of funding and lower interest rates.
SmallBusinessLoans does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisors.
