As a business owner, it’s often necessary to borrow money to fund your company and cover major expenses. But do business loans affect personal credit? And if so, how can you ensure that a business loan doesn’t impact your personal credit score negatively? Read on to find out.
Do Business Loans Affect Personal Credit?
Your personal credit score and business credit score work similarly. They’re both numbers that represent how responsible you are as a borrower, which can influence whether you’re able to borrow money — and if so, at what cost.
However, there are plenty of differences between these two scores as well. Put simply, one reflects your personal credit history, while the other focuses solely on your business dealings. Let’s take a closer look at how personal credit and business credit differ.
What Is Personal Credit?
When you borrow money as an individual — say, you open a credit card or take out an auto loan — that activity is reported to the major credit bureaus (Experian, Equifax and TransUnion).
They then build individual credit reports based on the information shared with them.
Next, credit scoring agencies, such as FICO and VantageScore, use the information on your credit reports to generate a credit score. Personal credit scores are associated with your Social Security number.
While there are many credit scoring agencies, all with their own algorithms, the one used most commonly by lenders and creditors is your FICO score. This is a three-digit number that ranges between 300 and 850. It considers factors such as payment history, how much you owe, the length of your credit history and more to determine your score. The higher your credit score, the more likely you are to be approved for credit and with the best interest rates and terms.
On the other hand, if you have missed or late payments, default on debt, max out your credit cards and display other risky financial behavior, your FICO score will drop and you’ll have a card time accessing affordable credit in the future. A poor credit score tells lenders that you’ve had trouble with borrowing money in the past, so you might not be approved for loans or lines of credit. If you are, you will likely need to pay a higher interest rate and/or fees to compensate for the higher risk you present as a borrower.
What Is Business Credit?
When you start a business, you need to establish an Employee Identification Number (EIN) in order to file taxes. Once you’ve obtained this number, your business’s financial history builds and so does its associated credit reports and score.
Your business credit score gives loan providers, vendors, suppliers, etc. a sense of your creditworthiness when it comes to borrowing money for commercial purposes. Credit bureaus like Experian and Equifax generate business credit reports and scores, as does Dun & Bradstreet, which calculates business credit scores only.
The bureaus consider many of the same factors as they do for personal scores, such as payment history and amounts owed. However, they also look at business-related factors such as how long you’ve been in business, how many employees you have, what industry you’re in and any public records such as bankruptcies or liens. Business credit scores range from 1-100 (100 being the highest score). Business scores that rely on the FICO Small Business Scoring Service (FICO SBSS) range from 0 to 300.
Additionally, while consumer credit scores are private, just about anyone can check a business’s credit score.
Here’s How a Business Loan Affects Personal Credit
Personal and business credit history are kept separate for the most part. But there are instances when they can cross over.
This often happens when a business loan comes with a personal guarantee. It’s common for small business owners, such as sole proprietors and partners. A personal guarantee means that if your business defaults on its loan, you are personally responsible for repaying it. The lender can collect payments from you, and seize personal assets to satisfy the debt, if necessary. If this happens, the defaulted business loan could show up on your personal credit reports.
In some cases, you might use your personal credit to fund a business venture. Again, this is common for startups and small businesses. For example, you might take out a personal loan or line of credit to finance your business, in which case the debt and its payment history will show up on your personal credit reports and impact your personal score. Missed payments will negatively impact your personal credit rating.
Business Loans Won’t Affect Your Personal Credit in These Situations
The good news is that a business loan won’t have any impact on your personal credit if you take steps to keep the two separate. For example, you borrow using your EIN and don’t make any personal guarantees.
Your business structure can make a big difference, too. For instance, incorporated companies (such as LLCs, C corporations and S corporations) with business loans rarely impact the owner’s or partner’s personal credit since they have their own corporate identity when used for lending purposes.
Keeping Your Business and Personal Credit Separate
As you can see, it’s a good idea to keep your business and personal finances separate whenever possible. The way you manage your personal finances can look a lot different than the way you handle your business, and you wouldn’t want one to negatively impact the other.
That said, sometimes it’s necessary to put your personal credit on the line to get a business up and running. Personal guarantees are fairly common in business financing, such as merchant cash advances. However, it can become a headache — and a threat to your financial well-being — if your business encounters money troubles and defaults on that debt.
If you’re struggling with business debt such as an MCA, it’s important to consult with a trusted legal advisor. At Tayne Law, we’ve been advising business clients and helping them resolve their business debt problems for more than two decades. We offer a free, no-obligation phone consultation to learn how we work and how we might be able to help you. So don’t struggle with business debt longer than you have to. Give us a call at toll-free at (866) 890-7337 or fill out our short contact form.