Applying for a business loan could be a great way to obtain the financing you have to grow your business. But are you aware that it can affect your personal credit and may make it harder for you to definitely borrow money for such things as obtaining a mortgage?
We've put together a guide to assist you to understand how a business loan may affect your individual credit and your business credit. And organized some tips how you can keep your business credit and your personal credit separate.
The Distinction between Personal and business Credit
Business credit works like personal credit. It provides a record of methods your company manages credit and debt. And merely as with personal credit, lenders and creditors use business credit to assess the creditworthiness of your business.
Business credit history and scores are completely outside of personal credit reports and scores. And business credit ratings are calculated differently from personal credit scores.
We put this table together to outline the differences between business and personal credit.
| Business Credit | Personal Credit |
| A business credit report includes a record of the company's history managing business debt and credit and includes a company profile. | A personal credit history contains a record of your history managing credit card debt and credit and includes your personal information. |
| The three main credit bureaus are Equifax(R) Business, ExperianTM Business and Dun & Bradstreet CreditMonitorTM. | The three main credit bureaus are Equifax(R),ExperianTM and TransUnion(R). |
| Business credit ratings typically vary from 0 – 100. | Personal credit ratings typically vary from 300 – 850. |
One other impact on note is that business credit ratings really are a part of business credit history, while personal credit scores aren't found on personal credit history.
How a Business Loan Affects Personal Credit
A business loan can impact your individual credit according to your business structure as well as your finances. The greater entwined your personal and business money is, the greater a company loan can affect your individual credit rating.
Also, a business loan could be according to personal credit if the lender uses it to assess your creditworthiness, particularly if you do not have established business credit history.
Keep in your mind, not all lenders and creditors report payment activity to personal credit bureaus. A business loan (or any loan) will often only affect your individual credit if it's reported.
Sole proprietorship
If you're a sole proprietor, you might not have business credit rating in case your credit history are associated with your Social Security number (SSN), and not an employer identification number (EIN).
Any loans you are taking out will likely have an affect on your individual credit score if you're operating as a sole proprietor without any EIN. In this case, the only proprietor would be viewed as the company. This means you may ultimately result in repaying the company loan as well as your payment activity will likely appear on your personal credit history.
Partnership
A partnership is when two or more individuals own a business together and each partner plays a role in every aspect of the business. Just like sole proprietors, you may not have business credit history in a partnership in case your credit history are tied to your SSN, not an EIN.
This business structure will probably possess a large effect on your individual credit ratings because the partners are thought to be the business. Partners is going to be responsible for repaying loans if the business can't and payment activity will likely be visible on each partner's credit history.
If you've got a limited liability partnership (LLP), partners is only going to owe a portion of the outstanding debt when the business can't repay the loan.
Limited liability companies (LLCs) and corporations
Unlike the prior business structures, LLCs and corporations (like an S Corp or C Corp) are legal entities which are outside of people. Your business EIN can be used to try to get loans, which means owners and shareholders aren't personally accountable for business debts unless an individual guarantee was signed (more on this later). So, in case your business can't repay the loan, your personal credit shouldn't be affected.
While loans might not always affect personal credit with LLCs or corporations, a lender may decide to review your personal credit to ascertain if they want to provide you with a loan.
Situations When Business Loans Affect Personal Credit
There are several situations when a business loan will likely affect your personal credit.
Who accounts for business debt?
If you are personally responsible for paying off business debts and also you can't pay them (aka insolvent), you will probably need to sign an agreement to work with an insolvency company.
As a sole proprietor or partner inside a partnership, you'll sign an individual voluntary agreement, dealing with the insolvency company to create periodic payments that the company divides involving the debt accounts to pay them off.
As an LLC or corporation, you'll sign a business voluntary agreement, but the repayment process works the same as a person voluntary agreement.
If you'll still aren’t in a position to repay your debts, you may need to seek bankruptcy relief.
Situations When Loans Don't Affect Personal Credit
If your individual and business finances are kept separate, it's likely a business loan won't affect your individual credit if you don't signed a personal guarantee. This means that owners of LLCs and corporations probably will not see business loans turning up on their personal credit history.
If you used business assets to have a loan, your individual credit likely won't be affected should you default.
How a Business Loan Affects Business Credit
When you apply for business financing utilizing an EIN, your company is tied to the loan, not you because the owner. What this means is your payment activity will probably appear on your business credit history (not your individual credit history) and influence your business credit ratings.
Remember, not every lenders and creditors report payment activity to business credit bureaus, so a loan will usually only affect your company credit if it is reported.
The better business credit rating you have and also the higher your business credit scores are, the greater the chance have getting financing.
How are you able to build business credit?
If you need to build business credit to obtain better financing options, there are some things you can do. Just make sure that when you're choosing financing options, the lender or creditor reports towards the business credit bureaus.
- Incorporate: If you select to establish your business being an LLC or corporation, another business credit profile is created. You can apply for an EIN using the IRS. Whenever you make an application for financing, you’ll make use of your EIN.
- Open accounts: Apply for a business credit card, a business line of credit or a business loan making use of your EIN. Only borrow money if you want it and ensure you manage your accounts responsibly by making on-time payments.
- Establish tradelines: Establishing tradelines (a fancy way of saying accounts) with vendors and suppliers is yet another method to build business credit. Like every other account, make payments on time to build positive credit.
Make sure you're monitoring your company credit history often. Errors may cause unnecessary drops inside your credit scores or imply fiscally irresponsible behavior.
Can Personal Debts Affect Business Loans or Credit?
If business debt can affect personal credit, can credit card debt affect business credit? The short response is yes.
If you own a small company, your personal credit and debt can impact your chances of obtaining a business loan. Since lenders usually run a credit assessment of your personal credit history whenever you obtain a small business loan (particularly if you really are a sole proprietor or partnership that doesn't have an EIN), any information in your personal credit reports can impact a lender's decision.
Having poor credit, high credit utilization or a lot of credit card debt can reduce your likelihood of being qualified for a small business loan. On the other hand, having a good credit score, low credit utilization or low amounts of credit card debt can increase your chances of being approved.
Tips for Keeping Business Credit Separate From Personal Credit
If you want to keep business finances, debt and credit separate from your individual credit, there are some things that you can do to do this.
- Business structure: Choose the best business structure that works for you, but remember, an LLC or corporation limits your personal liability for just about any business-related debt or lawsuits.
- Loans: Make an application for loans using the business EIN rather than your SSN. If you use your EIN, the borrowed funds is associated with your company, not you.
- Credit cards: If you are choosing a business credit card for financing, look for one that doesn't report to credit bureaus. Make your payments on time as some creditors may report defaults to non-public credit bureaus.
- Consult the lending company: Talk to a lender or creditor to see if they'll need you to sign an individual guarantee for a financial loan, whether or not they report to credit agencies (both business and consumer) and if they will look at your personal credit or not.
Remember, whichever business structure you choose, should you personally guarantee financing, it will likely be associated with your personal credit.
Risky Business
A business loan can affect your individual credit if the loans are associated with your SSN and show up on your personal credit history.
Business loans won't affect your individual credit should you applied together with your EIN, not your SSN, or else you come with an LLC or corporation, which would make your business a separate legal entity. If you don't signed a personal guarantee for a business loan, it's not going to affect your personal credit.
It can be dangerous business to tie your company and personal credit together, but when you're managing your debt responsibly, it may have positive effects on your personal credit.
