Getting a business loan has various requirements. Lenders examine several factors before approving your business loan.
Hence, are business loans based on personal credit? The answer is “yes.” Getting approval for a business loan depends on personal credit terms like credit score, credit history, etc. However, it applies more to small to mid-range ventures than larger enterprises.
Here, our expert business investors explore the whole scenario.
Fundamentals of Business Loans
Simply put, when you take a business loan, you ensure a running capital for your business. This borrowed amount crucially helps a business to start or expand its operations, manage cash flow, purchase equipment, inventory, or real estate, and cover many other business-related expenses.
The lender expects that the allocated money will fulfil business purposes only. However, the sanction of a business loan hinges on personal financial status. Why? We discuss that in the below section.
Discussion on Are Business Loans Based on Personal Credit
As we have already mentioned, business loans are based on personal credit scores and history. Below are the reasons. Reporting personal loans on tax filings is a concern for many.
- First, a good personal credit score and history indicate that you manage personal finances well. After examining your credit, lenders evaluate how good you are at handling finances. In this case, good personal credit provides a positive signal to them.
- To sanction a business loan, lenders check your credit score and history to know how much debt you hold as an individual. As you are the business owner, your debt responsibility matters a lot.
- Overall, a healthy personal credit score assures the lender that your financial condition is healthy. This understanding can generate a positive decision regarding business loan approval.
- Here, we must inform you that all business loans are not based on personal credit. Personal credit is not an issue If your business is extra large with many assets, employees, product lines, etc. It is because you actually act as a salaried employee of the business, and the business consists of a financial division or department with a strong organizational structure. In such an organization, the business account is totally independent, and nothing is related to the personal account(s) of the owner(s) except withdrawing salaries, etc.
Personal Credit Requirement to Get a Business Loan
Having a strong personal credit history, generally a score of 690 or higher, makes you eligible for a government-backed SBA loan or a traditional bank small-business loan.
On the other hand, if you go to online lenders to take a business loan, the credit requirement goes down. We see many online lenders approve business loans for people with a minimum personal credit score as low as 500.
Unfortunately, getting a business loan with a low credit score always comes with a higher interest rate. As a result, even if you get the loan approval, you will eventually pay a lot more due to a low credit score.
How to Get a Business Loan with Bad Personal Credit
Well, now you know that a personal credit score of 690 or above is the general requirement to get a business loan from a bank. But what if you have a lower credit score than this and do not want to go to any online lender to save some money in interest? Here are the ways to get a business loan with a bad credit score.
Give Collateral
Provide collateral to secure the loan if the respective lender is unsure of approving your business loan due to low personal credit. Here, you are offering something valuable as a guarantee called collateral.
Basically, collateral is considered a tangible asset, including things like the equipment you’ve bought for your business, commercial property, personal belongings, savings, investments, etc. However, we ask you to be careful to provide collateral.
We want to remind you that providing collateral means taking on more risk yourself. There can be a worse situation orientation if your business fails to do good in the future. So, only use collateral that you’re okay with losing if things don’t go as planned and you need to pay off what you owe.
Get a Co-signer
If your credit score is bad, try to get a co-signer for the business loan. It will divide the responsibility of paying off the loan. In this way, the lenders will get the confidence to approve your loan application for your business. However, in this case, your co-signer’s personal credit score also will matter a lot.
Apply for a Lower Amount
Ask for a small amount to increase your chances of getting a loan with a bad credit score. We suggest you do an in-depth assessment and find the right amount of money you require for your business goals. Don’t burden yourself with more debt than you need or can handle.
Before applying for a loan, closely examine your business plan, income statement, balance sheet, and financial predictions. Prioritize the needs and the respective costs. Now, align the plan with the cost. If it does not match, develop a plan B that comes up with less cost.
Final Thoughts
So, are business loans based on personal credit? We hope you understand the relationship between credit history and business loans. If you are a sole proprietor and your business is small, then your personal credit vitally influences the lender’s decision to approve your loan.
Finally, if you can afford it, take the help of a professional business advisor while applying for a business loan. A professional assistant will help you navigate through complex matters, and you will get the loan. Besides, refinancing a personal loan is a tricky business requiring expert advice.