Whether you just need some extra money to get your business through a tough time or are preparing to expand, you’ll need to make a business loan application. But you might be anxious about one question; will my business loan affect my personal credit? Banks and other lenders will assess different aspects of your financial history, both personal and business, to create a picture of how much risk you pose. Most of the information they will use is available in your credit reports, which are periodically updated by credit reference bureaus.
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Although business credit differs from personal credit, it pays to understand how a business loan will affect your credit rating.
Personal Credit Vs Business Credit: What’s the Difference?
Your personal credit is usually tied to your social security number and reflects your payment and funding history that you would use for different personal reasons, like a personal loan or student loan. Your business credit, on the other hand, is linked to your company tax ID. However, sole proprietorships or one-person LLCs are exempted from this rule. As a result, your business credit would be linked to the business owner’s social security number.
If your business does not have an Employer Identification Number and the loan is linked to your social security number, you’d be liable if your business fails to pay the debt. Many sole proprietorships opt to use the EIN to avoid such a scenario.
Business Loans and Personal Credit
Depending on the nature of your business and how you get credit, a small business loan may impact your personal credit score. Here are the two ways in which your business loan will affect your personal credit.
1. If Your Business Loan is Personally Guaranteed
Your personal credit will be affected by a small business loan that is guaranteed by an individual. This is often the case for sole proprietorship businesses, where you are legally liable for the debt payment. If your business is unable to pay the loan as agreed, the lender may move to collect payments from you personally. This will also position you as a consigner of sorts, implying that the debt may be reported on your personal credit report.
Your credit history will also be affected if you choose to personally guarantee your business line of credit.
2. Opening a Business Credit Card
A business credit card may be an excellent way to manage cash flow and boost your working capital. However, the way your business credit card account is set up will determine whether it affects your personal credit. It is unlikely that a company-issued business credit card to cover your work expenses will show up on your personal report because you are an authorized business user for the credit card.
You are considered more than just an authorized lender if you are a business owner with a business credit card. This is because the account will most probably be personally guaranteed, hence your personal credit will be negatively affected should the business credit go into default.
Before acquiring a business credit card, be sure to understand whether or not you’re personally guaranteeing the account. And should you use your personal card for business expenses, the payments will reflect on your report and impact your credit score.
Keep Your Business Loan Off Your Personal Credit
Here are some options to help you keep your business credit and personal credit separately.
- Pick the right business structure. Your business and personal credit will be the same if you are a sole proprietor. Choosing a company structure, like an LLC will separate your business credit from personal credit.
- Speak to your lender. Inquire whether your lender will look through your personal credit reports when approving your business loan. Such inquiries are hard pulls and will affect your scores. Make sure you’re aware of your lender’s policy for reporting loans before accepting any financial offers.
You will be held liable for the terms of the loan if you sign under your own name.
- Consider other options. Speak to your financial advisor about any alternatives available before tapping into your personal credit cards to finance your business. You may consider loans against your retirement plan since they don’t appear on personal credit reports.
Your personal and business credit histories can both make a difference when getting the best business funding since some lenders will consider them when reviewing your business loan application.
Separating your personal and business spending so that your personal and business credit won’t affect each other can help you avoid problems in securing financing for your business and maintaining a good personal credit score.