Will Your Personal Credit History Impact Your Business Loan Decision?
Taking on a business loan is a huge decision. Whether you are launching a new business or expanding an existing one, loans provide you with options that are unlikely to be available with cash on hand. Not only do loans help to facilitate large capital expenditures, but they can also help smooth out revenue disruptions that can be caused by significant business expansions. Unfortunately, applying for and receiving a business loan can be confusing if you haven't done it before. One of the more common questions faced by small business owners, in particular, is how their personal credit will impact their lender's final loan decision.
Business vs. Personal Credit
You know how your personal credit score works, but are you aware of how your business' credit score operates? Unlike the FICO score that most people associate with credit, business scores are graded on a scale from zero to one hundred. Other than this small difference, they work similarly from the point of view of both creditors and debtors. In other words, a higher score means better odds of being approved for lines of credit or loans. Likewise, regular payments towards existing debt will help to build a better business score, while missed payments will have a negative impact.
The situation can be slightly more confusing if you are a sole proprietor or member of a partnership, however. Financial institutions tie business credit scores to federal Employer Identification Numbers (EINs) in the same way that they link personal credit scores to social security numbers. If you don't hold an EIN because your business type does not require it, then your business and individual credit scores will be tied together.
How Your Personal Credit Score Impacts Your Business Loan Chances
When applying for a new business loan as a small business owner, the lending institution will likely look at both your personal and business credit histories. In general, however, lenders will be more interested in your business history. Your individual score will primarily come into play if your business is relatively new or if your company does not have a significant credit history. The longer your business has been operating, the less impact your personal credit history will have on your loan chances. If you can show that your company has a long and successful history that includes responsible credit use, then it is unlikely that poor personal credit history will sway the lender's decision.
Overcoming Red Marks on a Personal Credit History
What do you do if your personal credit is less than stellar, and you are attempting to take out a loan for a new business? Luckily, all hope is not lost. Unlike with personal loans, lenders place more weight on the supporting documentation that you provide for a business loan. You can potentially overcome an adverse credit history by arriving with sufficient collateral, a well-crafted business plan, and proof that you meet the requirements (licensing, etc.) for your industry. Although being adequately prepared does not guarantee that you will receive a loan, it will significantly increase your chances of receiving the money that your business needs.