Personal Credit Scores & Business Loans

Will Your Credit Score Affect Your Business Loan Application?

Congratulations! You’ve decided to begin applying for a small business loan.This exciting time for your new or existing company could forecast many great things.

If this is your first time applying for a business loan, you might not be aware of the potential barriers that can get in your way.After all, receiving a business loan for your start-up or expansion can be competitive, and banks want to ensure that they trust only the best with their investments.Before you jump all in, you’ll want to have a clear understanding of the things that could qualify or even disqualify you from receiving funding.

One of these factors is your credit score

If you are a small business owner in the United States, the three credit bureaus track two profiles: your personal financial history and your business credit history.

Each profile plays a vital role in getting approved for a business loan.However, if you’re starting a new business or your existing business doesn’t have established business credit, the lender may rely more heavily on your creditworthiness when making their lending decision.

While your personal credit score and business credit profile express different information about you and your business, both have a substantial impact on the options available to your business and your ability to qualify for a loan.

Why Lenders Care About Your Credit Score

Some business owners don’t think that their credit score has much of an impact when it comes to their organization.This isn’t the case.A potential creditor is going to consider your credit score when deciding to grant your company a business loan.

In general, a potential lender is going to view your credit score to determine if you:

Have the ability to repay the loan?
Are going to repay the loan?
Will pay the loan even if something unexpected happens?

Lenders see your credit score as an insight into your financial health and responsibility.

Unfortunately, if a lender sees that you are not able to manage your personal finances, they may assume that you are a high risk for managing business finances as well.This is especially true if you are a new business owner.Without an established business history or credit to your company’s name, the only way the lender will be able to determine creditworthiness is by accessing your credit score.

How is my credit score calculated?

Three primary credit bureaus generate a credit score for lenders to access.Each reporting agency uses the same basic FICO formula to score the information that they collect.

They also obtain personal information such as full legal name, date of birth, employment history, address, etc.They also list a summary of information that was provided to them by your creditors.Other information found in public records like bankruptcy or judgments is also included on your credit report and factored into your score.Each time that you apply for credit is also recorded on your report.

There are primary differences in the way that the three credit bureaus review and calculate your personal credit history.

For example, Transunion holds more detail about your employment information, Equifax separates your accounts that are open and closed, and Experian will record data like whether or not you are paying your rent and other bills on time.Essentially, these agencies are competitors, and lenders may choose to report to one bureau and not the other.While their data might include different results, their score is typically similar.

Importance of a Good Credit Score For Your Business

While you may not feel that your personal credit history is the best representation of how you will meet and exceed your business’s financial obligations, the need to establish and maintain a positive credit score is vital for every small business owner.Most banks and lenders take a close look at your credit score when they evaluate your worthiness as a business borrower and even consider the score in their decision-making process – regardless of how long your business has been operating.

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Frequently Asked Questions

Certainly. Unlike personal loans, you won't face any penalties for settling your balance ahead of schedule. However, it's crucial to keep in mind that if your credit card comes with a 0% introductory offer, it's essential to clear your balance completely before the 0% promotion expires and interest charges apply.

However, you can include additional cardholders, each with their own card. While sharing the single credit limit, the primary cardholder remains responsible for settling the debt.

Potentially, yes. Credit card APRs are typically variable, allowing lenders to change rates, impacting your monthly payments. Additionally, be mindful that introductory 0% offers can lead to higher interest rates once they expire. So, it's wise to clear your balance before that happens, if feasible.

Indeed, credit builder cards exist for those with less-than-ideal credit scores. These cards offer lower credit limits (typically £150 to £1,200) and higher interest rates. Responsible use, including full and on-time payments, can gradually boost your creditworthiness, potentially opening doors to better credit card offers down the line.