Can Small Business Loans Affect The Personal Credit Score?
Credit scores are an essential factor that lenders consider while accessing an application for small business loans. Most lenders have this checklist in their eligibility criteria. Business owners with no or low credit history often face difficulties qualifying for a financial product. Some alternative lenders provide loans with bad credit, but the loan terms may not be favourable.
Sometimes a lender runs both personal and business credit scores to judge the repayment ability of a borrower, your personal credit can be affected. A credit check is an injury to the credit score and enquiries can have a detrimental effect on your score. The solution is to choose lenders only after thorough research.
How do personal and business credit scores differ?
Your company’s worthiness can be determined by the business credit score. Some of the second mortgage lenders check this score before approving the loan application of a company or business. It gives a good view of your company’s payment history and shows any credit defaults and who you have made enquiries with. These records build up during the daily transactions. Lenders will get an idea of your debt-to-income ratio and credit utilization rates amongst several other aspects by analyzing your credit score.
Your personal credit score gives you an overview of your personal finances. Some private business loan lenders also consider the business owner’s personal credit score. In this case, a high score means more chances of approval. For new businesses, personal credit score gets more weightage.
In short, a business credit score reflects all the transactions done for and by the company. Your personal credit score reflects how much you owe, your credit, and your repayment record.
Why do lenders reject small business loan applications with bad credit scores?
If you are a new business start up, you may not be able to get a loan with a bad credit score. Here are some reasons for this:
The credit score is below the lender’s cut-off
There is a possibility that your loan application submitted to some lenders will get rejected when you have bad credit. They look at your credit report to see any recent enquiries or an payment defaults that may be reported, this can determine whether or not a loan is approved or not.
Some Second mortgage lenders also check the credit report to ensure that you can repay the funding or not or what is the chance that you will default the loan. When you default on your loans or delay credit payments, you have public records of bankruptcy & insolvency, and your credit score goes down. All this will get reflected in the report.
Your report has poor payment history
A bad credit score added with bad payment history or defaults can be an issue if you are trying to get funding for you and your business. Too many unpaid debts are not a good sign and may cause issues when trying to get a private business loan. Unsatisfied debts and wrong entries can also push your score down. It shows that you are not in the financial state to handle more debt. Lenders who rely heavily on credit reports when assessing a business loan will probably decline the application.
Lack of proper documentation to prove your income
Along with a credit report, some lenders also want to see your income before approving your application. It is an assurance that the borrower can repay a small business loan. Some lenders will reject your application if you fail to present documents that confirm your businesses income. Stating that making enough money regularly is not sufficient. You need to prove your steady cash flow to get approval for a loan. It shows your financial capability to keep the business running even at times of instabilities.
Can loans for business improve your personal credit score?
So far, we have seen that lenders can also consider the business owner’s personal credit score while accessing a loan application. New business owners who have just started with their first venture do not have anything to show as the repayment history of their company. Some second mortgage lenders will not lend to companies or businesses that have been in operation for less than six months. However, some lenders also consider your personal credit report in this case.
If your business has poor repayment history and bad credit score, this will affect your ability to get a loan. Some lenders will rely on your personal file to assist when considering an application for finance by a business.
Does a business loan improve your personal credit score? Yes, if you are a sole trader. Since small business loan applications of sole traders are approved by considering their personal finances, this improves their credit report. Such a loan will get reflected in the personal credit report. You will have better luck with future loans as your credit score improves.
End Thoughts
It is possible also for some lenders to approve your business loan application based on your personal credit score if you do not have sufficient history under your business file. In the case of a sole trader, the personal credit score can be improved by a business loan.