Securing finance is the critical step for a growing business. It needs working capital to keep your business afloat. So, business loans are the lifelines. Hence, does a business loan show up on your personal credit report? The answer is “yes, it does.” Your personal credit score relies on it.
Getting a business loan can influence your personal credit standing. As your business evolves, it will accumulate personal and business-related financial obligations. Simply put, your personal and business finances will overlap over time.
Let’s check out what our banking experts have to say.
How Does a Business Loan Show Up on Your Personal Credit Score
In simple terms, when you take a business loan, it can affect your personal credit if the lender asks for a personal guarantee. It means you have to use your personal credit to get the loan. So, you are legally responsible for repayment.
This personal guarantee is often required for business loans and lines of credit, especially when there is no collateral (like property) backing up the loan. If you have a low personal credit score, it can be harder to get approved for these loans.
Also, sometimes business owners use their personal credit cards for business expenses or even take out loans against their homes. Here, your personal credit is tied to your business finances, too. Besides, can you get a next-day personal loan?
Some Examples
- Imagine you’re a small business owner. You need a business loan of $10,000 to buy equipment. So, your bank requires a personal guarantee if your business is relatively new and has no strong credit history yet.
Now, your personal credit score is 700, which is considered pretty good. With your personal guarantee, the bank approves your business loan application, and you get the $10,000 loan.
- However, now imagine a different scenario: the opposite one. If your personal credit score were much lower, say 550 (considered fair to poor credit), the lender or bank will hesitate to approve your application. They might offer you the loan at a higher interest rate because of higher risks.
Thus, any potential business loan and terms are contingent upon your credit score.
How a Business Loan Does Not Affect Your Personal Credit Score
However, several business loans will not affect your personal credit.
- For instance, some business loans only ask for an Employer Identification Number (EIN) and not a Social Security number (SSN) during the application process. So, they need no personal credit check or personal guarantee.
- Invoice factoring is another method that uses unpaid invoices as collateral for a loan. Here, a personal guarantee is unnecessary and impacts no personal credit.
- A few business owners might qualify for a corporate credit card without a personal guarantee. However, companies offering such cards often have strict criteria based on the number of employees and annual business revenue. The Brex 30 Card, for example, avails business owners of a corporate credit card disregarding their personal credit.
- Say a business is a corporation (like an LLC, C corporation, or S corporation). This legal umbrella can protect the business owner’s personal assets in case of bankruptcy or lawsuits. But if someone operates their business as a sole proprietorship, they cannot benefit from these legal protections.
Impact of Business Loans on Personal Credit Score
Here, we will consider three factors to explain better the impact of a business loan on your personal credit.
Requirement of Personal Guarantee
When a business loan demands a personal guarantee from the owner, it essentially places the entire responsibility for repayment squarely on his shoulders. It disregards the business’s health. So, no matter what happens with the business, the owner is legally bound to repay the debt. The U.S. Small Business Administration (SBA) highlights its frequent use against unsecured business loans and unsecured business lines of credit.
For instance, you own a small bakery and need a $20,000 unsecured business loan to expand your operations. The lender insists on a personal guarantee. A few months down the line, your bakery faces unexpected financial challenges, and despite your best efforts, it fails. Eventually, you cannot repay the loan. Hence, the business defaults on the loan.
Because of the personal guarantee, you are legally obligated to repay the entire $20,000 loan. Even though your bakery has declared bankruptcy or faced insurmountable financial difficulties. The personal guarantee makes you responsible for the debt. Hence, it can have significant implications on your financial stability.
Types of Business Loans
Not all business loans have an impact on your personal credit. These loans have no impact on your personal finances. We have already discussed invoice factoring.
The second one is the Corporate Credit Cards. If your business meets certain criteria, you can get corporate credit cards for business expenses without needing a personal liability. These cards keep personal credit separate and safe from any problems with business finances. Thus, your personal finances stay secure while financing your business needs.
Structure of Your Business
When you incorporate your business, it comes with significant legal and financial protections, including the safeguarding of certain personal assets. Say your business operates as an LLC, a C corporation, or an S corporation and encounters financial difficulties, such as filing for bankruptcy. Your personal assets, like your home and car, are shielded to some extent.
However, it’s important to note that if you’re running your business as a sole proprietor or part of certain partnerships, you enjoy no such financial protection. For example, limited partnerships often involve one partner with unlimited liability and others with limited liability. If your business fails, you are putting your personal assets on the line as the general partner with unlimited liability.
Final Words
So does a business loan show up on your personal credit report? We hope this explanation helps you understand the liabilities. This financial obligation relies on various issues, including business type, strategy, law, etc. It might appear or not show up on your personal credit score on those factors.