Does A Business Loan Affect Personal Credit?

Navigating the world of financing as a business owner can feel like you’re walking on a tightrope. You may be unfamiliar with how things like a business’s debt, payment history, or default can impact your personal credit, which only makes it harder to move forward. 

To get you moving in the right direction, this article will review the differences between these two types of credit. Additionally, you’ll learn about how a business structure can influence this dynamic, and the potential repercussions business loans can have on your personal credit. 

Whether you’re a seasoned business owner or just starting out, understanding these nuances, as well as the options at your disposal, is key to maintaining a healthy financial future for both your business and personal life. 

Difference Between Business Credit and Personal Credit

Your business credit and personal credit aren’t the same thing. Your personal credit score is tied to your social security number, and it’s typically viewed as how reliable you are in managing your personal finances. Factors like your payment history, how much credit you use compared to your limit, and the length and mix of your credit accounts come into play. Your personal credit score comes under scrutiny when you seek personal finance products like credit cards or mortgages.

Business credit, on the other hand, relates to your company’s financial credibility. It’s usually linked to your company’s Employer Identification Number (EIN). However, if you’re a sole proprietor without employees, your social security number is used for both personal and business credit. 

When you’re in the market for business financing, business credit scores are vital. High scores can unlock low-cost loans with attractive terms. Low scores, however, can make it challenging to secure good financing deals. So, while both types of credit scores are important, they serve different functions in your personal and business life.

How Can A Business Loan Affect Personal Credit?

Remember, your personal credit relates directly to you. It’s tied to your social security number and reflects how well you handle your personal finances. However, in situations where you register your business as a sole proprietorship, your personal credit can be affected by your business activities, since the two are intertwined.

Business credit, on the other hand, is linked to your business, especially if you register it as a corporation or an LLC. These types of business structures are separate from your personal finances. That said, if you secure a business loan with a personal guarantee, you’re pledging to pay back the loan personally, even if your business can’t. This can impact your personal credit.

So, when thinking about how a business loan might affect your personal credit, keep these factors in mind: the structure of your business, the nature of the loan, and how you’d handle a default situation. Business credit and personal credit are separate things, but they can intersect, especially in the cases of sole proprietorships and personal guarantees.

Your Business Type

When it comes to structuring your business, several options exist, each with its unique benefits and drawbacks. Your chosen structure will determine if your personal credit is tied to your business. 

Limited Liability Company (LLC): In an LLC, the business functions as a separate legal entity, keeping your personal credit distinct from the business. Unless you personally guarantee the loan, you’re not responsible for the business debts. As a result, your personal credit score isn’t affected by the business’s debt repayment ability. That said, keep in mind that some lenders might still check your personal credit alongside your business credit when making loan decisions.

Corporation: Similar to an LLC, a corporation operates as a distinct legal entity, ensuring your personal credit remains unaffected by the business activities. The financial affairs of the business won’t impact your personal credit.

Partnership: When dealing with a partnership business, lenders typically require the credit information of every partner involved. Should the partnership fail to repay its loans, all partners bear the responsibility of settling the debt. However, if it’s a Limited Liability Partnership (LLP), partners are only on the hook for a certain percentage of the total debt. Remember, any loan that the partnership business takes out will have an impact on the personal credit scores of all partners involved.

Sole Proprietorship: With this business type, you’re the only owner. This structure gives you maximum freedom and control over your business. However, it also means your personal and business credit scores are one and the same. If you don’t employ anyone, all loans will be linked to your social security number, not an EIN.

Your Loan Terms

Securing a business loan can be tricky. Lenders usually ask for collateral or a personal guarantee before they approve and fund your loan. The good news is, using your business’s assets as security won’t hurt your personal credit.

However, if you personally guarantee the loan, it’s on you to repay it should your business default. It’s common for start-ups and small businesses with limited credit history to provide personal guarantees. And, if your business is seeking an unsecured loan, most lenders will require one too.

Keep in mind that any late payments or defaults by your business will leave a lasting mark on your credit. So, consider the potential impact before signing that personal guarantee.

Your Resolution of Defaults

Sometimes it’s necessary to take a large loan out for your business. However, this decision could put you at significant risk. If your company cannot repay the loan, you may have to deal with a default. 

If your creditors can’t get their money back, they could set their sights on your personal assets. This situation can lead business owners having to declare personal bankruptcy.

Think about what happens when bankruptcy is marked on your reports. It could seriously harm your credit score. You might find it tough to get approved for personal loans, car loans, or even a mortgage. So, be mindful of these potential consequences before you take that step.

When Does A Business Loan Affect Personal Credit?

There’s a variety of business loans out there, and each one can affect your personal credit differently. But remember, if you personally guarantee a business loan, it’ll have an impact on your credit.

As an owner of a business, you might find yourself personally guaranteeing loans. This is often the case for sole proprietors and partners. Keep in mind that if your business can’t repay its loans, you could be on the hook. As a cosigner, any defaulted business loans could end up on your personal credit reports and impact your personal credit negatively.

What if you’re using your personal credit to fund your business? Well, if you’re tapping into personal lending solutions, such as home equity loans, they will appear on your credit history.

And it’s not just loans. A business line of credit could also affect your personal credit if you’re the one guaranteeing it. This impact can be good or bad. If your business pays back its debt on time, it’s a win for your credit score. But if it struggles, your credit score might take a hit. So, be sure to weigh these factors carefully.

When Doesn’t A Business Loan Affect Personal Credit?

How can you ensure your personal credit remains unaffected by your business loan? The answer lies in keeping a clear separation between your business and personal finances.

Is your business a separate legal entity like an LLC, C corporation, or S corporation? If so, your personal credit will typically remain unaffected by business loans. This is because these business structures have their own legal identities. As an equity holder, you bear no responsibility for the company’s unpaid or accumulated debt.

What about business credit cards? If you’re simply an authorized user of your firm’s card, it won’t be a blip on your personal credit reports.

When choosing a business credit card, target those that do not regularly provide financial transaction details to personal credit bureaus. Additionally, you’ll want to stay in the habit of prompt payments to prevent credit card companies from reporting your business to credit bureaus.

However, a word of caution if you’re a sole proprietor. Lenders perceive you as more than an authorized user. Should the account have your personal guarantee, the business credit card will certainly appear on your credit records.

Lastly, during a business loan application, if you supply only your EIN (Employer Identification Number), it won’t affect your personal credit. Without your official signature and social security number, creditors won’t report this loan to consumer credit bureaus.

Do SBA Loans Affect Personal Credit?

Are you looking into financing your business with a Small Business Administration (SBA) loan? If so, understand the implications of securing one with a personal guarantee. The SBA can flag a default on your personal credit report. Federal law gives the SBA the right to report such unpaid debts to credit reporting agencies (e.g. Experian, TransUnion, and Equifax).

How Does A Personal Credit Score Impact Your Ability To Get A Loan?

Your personal credit score plays a pivotal role in the process of securing a business loan, with distinct impacts based on whether you have a good or bad credit score: 

Loan Approval: A good credit score can significantly enhance your chances of loan approval as it’s often seen as a positive indicator of financial responsibility. Lenders perceive you as a lower risk. Conversely, a low credit score could make securing a business loan more challenging. In this case, lenders might view you as a high-risk borrower, leading to potential loan application rejections.

Interest Rates: Interest rates are basically the price of money, which is tied to perceived risk, so your credit score plays a significant role. A strong credit score can help you secure a loan with more favorable terms, such as lower interest rates, reducing the overall cost of your loan. However, if you have a poor credit score and still manage to secure a loan, you’ll likely face higher interest rates, which will increase the total cost of borrowing.

Loan Amount: Your credit score also influences the amount lenders are willing to offer. With a good credit score, lenders may be more willing to provide larger loan amounts, confident in your ability to repay the debt. On the other hand, lenders might limit the amount they’re willing to lend to someone with a lower credit score due to the perceived risk of default.

Options: Finally, your credit score affects the range of financing options available to you. Good credit opens up a wider range of possibilities, with more lenders likely to approve your application, and you may qualify for more types of loans. In contrast, with a bad credit score, your choices for lenders and loan types might be severely limited. You may need to consider alternative forms of financing or work on improving your credit score before applying for a business loan.

Why You May Want to Consider Alternative Business Lending

Alternative lenders, like Unsecured Funding Source, are emerging as powerful allies for individuals seeking business loans, especially those who find themselves sidelined by traditional lenders. Below, you’ll see how we help individuals secure the financing for their business needs, and why you may want to consider alternative business lending yourself:

Protecting Personal Credit: We recognize the importance of protecting your good credit score from the potential negative impacts of a business loan. Our in-house lending programs offer options that don’t report to personal credit bureaus.

Faster Approval and Funding: We know that time is of the essence when you need funds for your business. Our approval processes are designed to be quicker, ensuring a faster disbursement of funds than what traditional business loans or lenders typically offer.

Flexible Terms: We believe in giving you the freedom to manage your business finances at your own pace. That’s why we offer longer repayment terms and schedules, keeping debt service as manageable as possible..

Innovative Loan Products: We are committed to meeting a variety of business needs, offering a wide range of innovative loan products like our Medical Practice Loan for healthcare providers or our Jumpstart Loan^SM  for those launching a franchise or buying a business. 

Building Business Credit: If your aim is to build your business credit separate from your personal credit, we’ve got you covered. We report to business credit bureaus, aiding in the establishment of a strong business credit profile.

No Collateral Requirements: We understand the risk associated with collateral that traditional loans often require. We offer unsecured loans, eliminating the need to pledge any personal assets or collateral. 

Get Started With Jumpstart Finance Today

At Jumpstart Finance, we love helping entrepreneurs. We’re here to help whether you’re looking to start or buy a new business, expand your operations, or get a much-needed injection of cash flow. 

Don’t let worries about your personal credit score or the risk of putting up your assets as collateral stand in your way. We’re proud to offer a variety of business loans that work for you, not against you. Let us help you safeguard your assets, protect your personal credit, and take your business to the next level. 

If you’re looking for business financing that’s able to meet you at an individual level, let’s talk! You can reach out to us at 866-475-4254 or apply now online.