Does My Small Business Loan Affect My Business or Personal Credit?
Business credit and personal credit are both important factors when it comes to borrowing money for your company. Although lenders vary, they may review both scores when you apply for a business loan. Similarly, taking out a business loan can impact your personal credit and business credit scores. Learn more about how a business loan can impact your business and personal creditworthiness.
What’s the Difference Between Business Credit and Personal Credit?
Business credit and personal credit are both used to measure one’s likelihood of debt repayment, but they work slightly differently. Business credit is measured by business credit bureaus, which include Dun & Bradstreet, Experian and Equifax. The major personal credit bureaus are Experian, Equifax and TransUnion. Business credit is generally associated with your business’s employer identification number (EIN) or tax ID, while personal credit is tied to your Social Security number.
In some cases, very new businesses may not qualify for business credit. Additionally, certain organizational structures, including sole proprietors and one-person LLCs, are not required to have an employer identification number. In such instances, business owners may have a business loan associated with their personal credit and Social Security number.
Why Do Lenders Ask About My Personal Credit?
Personal credit health is often a factor in a business loan approval decision, particularly if your business is very new, has a limited business credit history or if your organization falls under certain business structures. Because lenders often inquire about personal credit scores, it’s a good idea to aim for as high a credit rating as possible. Maintaining a low credit utilization ratio and making on-time payments are two of the best ways to raise or maintain credit scores over time.
Does a Business Loan Affect My Business Credit?
When you take out a business loan, you should expect payment information to reach one or more of the business credit reporting bureaus. Similar to personal credit, lenders and other businesses with whom you regularly work with may send your payment data to credit bureaus, which is used to build your credit history and score.
Although each business credit bureau calculates credit scores slightly differently, the following credit usage factors can impact your business credit score:
- Payment history, including whether payments have been made on time and in full
- Credit utilization, also known as credit usage ratio
- New lines of credit taken out within the past six months
- Business details, such as the number of years in operation
- Collections or liens against your business
Positive credit usage, including making on-time payments and keeping a low credit utilization ratio, can help improve your business credit score over time. On the other hand, late or missed payments and using too much revolving credit can negatively impact business credit.
Does a Business Loan Affect My Personal Credit?
A business loan may affect your personal credit in certain circumstances. If you personally guarantee or secure the business loan, you’re liable for the loan repayment. A secured loan requires some form of collateral, while a personal guarantee means you’ve personally guaranteed to repay the loan should your business default. Business credit requirements vary, but some lenders require a personal guarantee for certain types of loans. While your specific situation may differ, late business loan payments can negatively impact your personal credit history. If you always make on-time business loan payments, your personal credit score can positively reflect this behavior over time.