Does a Business Loan Affect Personal Credit – Truth Unveiled!

Many people dream of starting a business of their own. If you’re one of them, it’s best to understand the kind of factors that may influence your ability to find success. One such factor is your credit rating.

Your Credit Score is Important

According to Lantern by SoFi, “Even with bad credit, it may be possible to secure startup business loans.” At the same time, it’s best not to underestimate the importance of your credit score. You know your score before you do anything else. That will give you a sense of what you need to consider in terms of financing for your business.

Your Personal Credit Score

Your personal credit score is going to play an important role in how you run your business. Remember, you can get small business loans for bad credit. At the same time, it can be harder when you don’t have a good credit score. That is why you need to know your credit score well in advance.

There are certain steps you can take that will help you bring up your credit score. For example, there may be people who share your name and have less than ideal credit. You want to make sure your scores are being reported correctly by all credit reporting agencies.

Overview Of the Relationship Between Business Loans and Personal Credit 

Business loans affect your personal credit in several ways. Here are some of them:  

1. The personal guarantee that the business owner provides includes the lender to consider their personal credit history.  
2. The sole proprietors are responsible for any business debt which includes repaying the loan. This will impact the owner’s personal credit which may be harmful if they seek personal loan in the future.  
3. Defaults or late payments can negatively affect your credit report.  
4. Using the business line of credit requires the guarantee that it will meet its financial obligations. This makes you responsible for paying the debt.  

Factors such as the business structure, loan you’re using and the process of handling the loan default all determine the impact business loan will have on your personal credit.  

Your credit score also plays a role in determining your eligibility for both business and personal loans. A higher credit score translates to better loan terms and high approval.  

Impact of Business Loan Payments on Personal Credit 

A business loan impacts your personal credit – we’re clear on that. But how? That’s what we’re here to solve. Check out the following:  

1. Sole proprietorship  

This is when a business and the owner are the same. Consequently, their personal credit score is the same as their business credit score. If the owner defaults on the business loan their personal credit score gets affected directly.  

2. Limited company 

In a limited company, the business is a separate legal entity from the owner, in which the latter are not personally liable for the business debts. In addition, the lenders may still check the owner’s personal credit history before approval.  

3. Partnership 

The partners are jointly liable for the business debts and all the partner’s personal credit history is checked before approval.  

There are a few other factors that impact this and those include:  

• If you are personally guaranteeing the loan 

• The type of business financing  

One way it cannot affect your personal credit is by only providing an EIN or the Employer Identification Number. This prevents liability to you as you sign papers that do not require your social security number or official name.  

Varied Types of Businesses

Another thing to bear in mind is that there are lots of different types of business ventures. For example, you might wish to start a sole proprietorship. In that case, you are the sole owner of the business. That means your credit is hugely important as you are the person in charge. Another type of business is the limited liability partnership. This is when you opt to open up a business with another person.

In that case, you will need to know your partner’s credit history. If they have good credit, that can make it easier for you to get a business loan. If you have a larger business venture such as a private company, that can spread out your credit possibilities even further. Having many people on board at the same time allows consider additional financing options for your business in the future.

Forms Of Credit

If you are opening up a business of your own, it is also important to know what types of credit are available. A short-term loan can help you get the venture off the ground from the start. That is one way to gain access to the capital you need right now. You can also get a personal loan based on your credit history.

Even if you don’t have perfect credit, many banks and other financial institutions are happy to work with you. A credit card designed just for business purposes can ease your way into the business plan you want.

Information is important when running a business. You’ll benefit from an understanding of how your personal credit history can impact your business plans.

Wrapping It Up!  

That was for you to know how does a business loan affect personal credit and their relationship with each other. The article also describes all the ways in which you can be liable for a business loan, provided you are not smart while applying for a business loan.  

The article also helps you understand how you can ensure there are no loopholes that put your credit score at risk.