Does a Business Loan Affect Personal Credit?

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Credit is important when you’re building a business. It’s one of the core decision makers when you’re looking for a business loan. With banks your business credit is most important, but alternative lenders often look into your personal credit history. With all this business and credit talk, it’s sensible to know does a business loan affect personal credit. Different lenders use different information when processing the business loan. Whether or not you take a hit on your personal credit depends on how you apply for the business loan.

How a Business Loan Application Process Work

Although there are steps to apply for a business loan, not all procedures are uniform. It depends on the company, what you need, and what you have. When you wish to apply for a business loan, some lenders review your information first to see what you qualify for. They review your current assets, liabilities, and basic information. If they see you as a good fit, you can proceed to apply.Business Financing Hub - Does a Business Loan Affect Personal Credit

Here’s where lenders may involve your personal credit. Once you complete the loan application, the business status may require your personal credit report. New companies will most often need personal financial statements, a personal guarantee and/or collateral. If you’re well established, your business credit and other company information may be enough.

Startups and many small businesses have not yet built a reliable business credit score. In fact, many of them still don’t even know they exist. Like with personal credit, certain bureaus track and report business financial activity. The main three for businesses are Dun & Bradstreet, Experian, and Equifax. The credit history for a business is practically public information.

Having the business name and address will grant access to their credit records. Unlike some personal credit instances, not even financial inquiries will affect your business credit score. Because the bureau don’t disclose the business information, owners aren’t penalized when people conduct a search.

When Does a Business Loan Affect Personal Credit?

When you apply for a business loan, the way lenders access your information can affect your credit. With personal credit, there are two different types of pulls; soft inquiries and hard inquiries.

Two circumstances will get you off the hook with your personal credit. When the lender does a soft inquiry, it doesn’t affect your personal credit. Approving the loan by other means doesn’t impact your personal credit either.

Soft Inquiries

Soft inquiries or soft credit checks only give a snapshot of the activity on your credit report. Most lenders use it to pre-qualify or pre-approve you for financial products. With a business loan, lenders use it to give you more insight into how much you can get for the loan. You can view all the soft inquiries on your credit report, but others can’t. So it doesn’t show to potential lenders.

No Credit Check

If the lender relies solely on business credit, they won’t need to pull your personal credit information. Some may still report to your personal credit if you default on the loan, but not if you maintain good payment activity. A rare few won’t involve your personal credit at all. They use other business information to make a decision like:

  • Age of the business
  • Business revenue
  • Accounts receivable
  • Merchant or ACH activity
  • Assets and Collateral

Business Loans that Affect your Personal Credit

This is when the answer to does a business loan affect personal credit would be “absolutely”. One main activity can damage your personal credit when getting a business loan:

Hard Inquiry

These credit checks are what their name implies. They stick around on your personal credit report for a while (up to two years). Lenders pull the full report showing a detailed layout of your personal credit history. This comes after the pre-qualification stage when you’ve made the decision to move forward with one company. The inquiry drops your score 1-5 points.

How much of a score drop you’ll see depends on:

  • Type of loan you applied for
  • Amount of the loan
  • The state of your credit at the time of the application

Even though the hard inquiry may linger around for a while, it only impacts your personal credit score for about a year. Bureaus are supposed to remove this information automatically, but sometimes they don’t. It’s important to check your credit and score at least once a year and follow up on any mistakes.

Using Personal Guarantees to Obtain Business Credit

Startups and those who haven’t established sound business credit may need a personal guarantee. Some lenders may also require it if you don’t have enough assets for collateral. It goes with other documentation to approve the business loan. You may be wondering where personal guarantees come in with does a business loan affect personal credit.

Bplans describes a personal guarantee as an unsecured written promissory note from a business owner guaranteeing payment on a lease or loan if the business can’t or won’t pay. It authorizes lenders to access a business owner or officer’s personal assets to remedy the default loan. Not knowing the full scope of business financials can be detrimental  to your livelihood.

How to Minimize Business Loan Effects on your Personal Credit

  1. Make payments on time- most business loans and business credit cards hurt your personal credit when you’re late or in default.
  2. Start building your business credit score. That way you’ll rely on personal guarantees less often. Even alternative many alternative funding options report activity to your business credit.
  3. Don’t organize the business in your personal name. Set up an LLC instead. This helps separate business activity from personal. A separate entity protects your personal assets if something does go wrong. Lenders can’t go after the borrower’s possessions without a personal guarantee.
  4. Be strategic in the way you shop for business loan rates. Hard inquiries aren’t just a one time deal. The 1-5 point decrease is per inquiry, so use them sparingly. You don’t get a break when you’re shopping around like you do with home, auto, and student loans. Do research and ask questions before actually applying. Then stick to a few lenders when you’re ready to seriously inquire or apply.

Does a Business Loan Affect Personal Credit?

As you’ve learned it’s possible to impact your personal credit from a business loan. Most of the time, the changes will be negative, not positive. Most business lenders report on a borrower’s personal credit when they’re late or in default. The best way to know for sure is to ask the lender before applying. You can also talk to experts to learn more about business and personal credit.

Apply for Credit at Business Financing Hub

Take the lessons you’ve learned and make smart decisions about your credit. Business Financing Hub is a portal to empower you in building business credit. Financial industry professionals designed the website for you to apply for personal and business credit cards. Apply online at Business Financing Hub.