Starting a new business, or financing an existing one can mean borrowing a business loan. Business loans can sometimes impact your personal credit. Before taking out a business loan, it will be critical to understand how they work as well as how to maintain good credit. If you’ve been wondering “does a business loan affect personal credit?” then you’ve come to the right place.
The Variable of Your Business Set Up
A business can be set up in a certain way. And this business structure determines whether there is a connection to your personal credit.
A business loan will impact your personal credit, if your business is set up as the following:
- You are a Sole Proprietor:
A sole proprietorship means you are the complete owner of your business. This gives you freedom and complete control. Having a business structured this way means that your personal credit will be linked to your business credit score.
This includes loan activity, business credit card use, and any other financial endeavors. A business that is controlled solely by you, means a direct link to your personal credit score.
A partnership will have two or more owners. Any financial activity from yourself or a partner in the business affects personal credit.
Your personal credit scores and business credit scores will not be linked if your business structure is set up as the following:
- A Limited Liability Company (LLC)
An LLC functions as a corporation and a partnership. The convenient thing about businesses that operate this way is that your personal credit will not be linked to your business.
- A Corporation
A corporation is a separate legal entity from its owners. This separation also includes finances. And so, your personal credit will not be impacted by your business decisions. A C-corp, S-corp, and B-corp, and Non-Profit Corporations are all considered corporations.
In these scenarios, business debt, business credit cards, or financial activity will not have an impact on the business owner’s finances.
The Importance of Understanding Business Loan Terms
Business loans, similar to other kinds of lending, will have various terms.
When you apply for business loans, lenders will take a look at your personal credit scores. This helps them see an overall picture of your finances. This is especially true for a business that is just starting. However, this does not automatically link your loan with your personal credit.
Banks, credit unions, private lenders, and even the government, will ask for either collateral or a personal guarantee to give out business loans. When a business loan is personally guaranteed, it means that you will be responsible for repaying the lender if the business defaults. And so, a loan secured through a personal guarantee can affect personal credit.
Why Do People Choose Business Loans with a Personal Guarantee?
Below are some reasons that people take out business loans which include personal guarantees:
- Their business does not have many assets to use as collateral.
- Improving chances of approval and loan amount.
- To receive better loan repayment terms, such as better interest rates.
- Their business may not have the best credit history or any credit score.
The Different Types of Business Loans
Choosing the right business loan for your needs is an important factor moving forward. Below are a few of the various categories of business loans:
A Small Business Administration Loan (SBA Loan)
SBA are loans that come from the government. They are similar to a personal loan. To take out a SBA, you will need collateral from your company, or use personal assets to do so. These loans can come with different terms and interest rates.
Merchant Cash Advances
A Merchant cash advance is a quick way for a business to get funding. The merchant gives a business money upfront and collects the funds in small increments from a debit or credit account.
Business Credit Cards
A business credit card works similarly to a personal credit card, but with any business expenses. A credit card issuer such as a bank may require that you have a business account with them to be eligible for their business credit card.
These loans help business owners get funding for different equipment that may be necessary.
Business Lines of Credit /Business Credit Lines
A business line of credit is similar to how a credit card works. You can borrow as much as you need up to a certain limit. The interest will be calculated based on the amount borrowed. A business may turn to these loans when they need to borrow more than what a business credit card issuer can provide.
Term loans can be used for several business-related expenses. A small business owner will receive a lump sum, which can be kept in a business bank account. It is then repaid slowly over the set date of time.
A combination of these loan types can fund the different business expenses to grow your business. Making loan payments in full, avoiding late payments can mean a positive business loan effect on your business’s future relationship with lenders.
Having A Successful Run with A Business Loan or A Business Credit Card
Handling a business credit card or business loan is much like handling that debt outside of your business. Below are a few strategies that can help you succeed when borrowing funds for your business:
- Make timely payments. Late payments can add more interest and fees.
- Never borrow more than you need with credit lines or loans.
- Keep track of your partner’s or partners’ debts (If applicable).
- Have a successful business plan.
- Be transparent with your credit card issuers and loan lenders.
- Check credit reports with several credit bureaus.
- Choose the right business credit card and loan.
Using Personal Credit to Fund Your Business
Small business owners or those who are just starting, may fund their business with their personal credit. Done through traditional lenders and loan types. Home equity loans, a home equity line of credit, personal credit cards, and personal loans are a few options.
Your personal scores and personal finances will be impacted when using these alternatives to a business loan. Any lending you take out, even if it is for a business expense, will be reported to the major credit bureaus. And so, although these types of loans are technically not business loans, they can still affect personal credit.
How Can I Check My Credit Score and Credit Report as A Business Owner?
Just like individuals have a personal credit score, businesses also have their own—called a business credit score. A business owner will have to apply to create a business credit file. This is done through consumer credit reporting agencies. The major business credit reporting agencies are:
- Dun and Bradstreet
- Experian Business
- Equifax Business
Business credit scores/business scores are on a scale between 1-100. Factors such as payment histories, credit utilization, and diversity of business debt are all important. Attempting to build business credit, or improve a business’s creditworthiness is similar to building or improving personal credit history.
Your business’s credit score can impact things like future business loans, growth opportunities, and potential partnerships with other companies. And so, it is extremely important to monitor your business credit report often for accuracy. Head online to any of the 3 major business reporting agencies for a copy of your business credit report.
Checking your personal score and personal credit history is easy as well. You can get copies of your personal credit reports from any of the credit bureaus below:
These are the major consumer credit bureaus that can be used to get your personal credit report. When checking your personal credit report make sure to get a copy from all three. Also routinely monitor your personal credit report for errors.
The Bigger Picture of Having Business Credit Connected to Your Personal Credit
When a business’s finances affect personal credit, the impact can be long-lasting on your credit score. For example, payment history, business credit card usage, and business debts, all will be a part of your personal credit history. It’s important to know how any loan can impact your credit, whether it’s a business loan or an online installment loan.
Businesses can be volatile. When taking on the fiscal responsibility of a business, think about both the pros and cons. For some, having full control of their business is worth the link to their personal credit scores. And when done right, this link can have a positive impact on your personal credit score. However, the opposite can also be true when you are personally responsible for your business.