Does Personal Credit Affect Business Credit?
If you’re getting ready to apply for a loan, you may wonder whether your personal credit is a factor in receiving approval. Does your personal credit score affect business credit approval? Yes and no. The impact of your credit history depends on the type of financing you’re applying for.
Financial Institutions and Loan Types
Every lender has different requirements for getting loan approval. However, many traditional banks do look at your credit score when determining whether to give your business a loan. This is especially the case if you have a sole proprietorship since you’re the one running the business.
Depending on your personal credit, banks may request you to put up collateral to mitigate risk for a loan. There are a few circumstances, however, where your credit doesn’t have a large impact on financing approval. If you apply for an equipment lease, for example, the equipment acts as collateral and covers the cost of your monthly payments.
Alternative lenders may care very little about your credit rating. In the case of invoice factoring, what matters is the credit of your customers and the amount of your invoices. Other lenders look at your business’s cash flow or credit card sales to determine how much capital to extend you.
Why Your Credit Rating Matters
Why do banks care about your personal credit history? For two main reasons: to mitigate risk and to evaluate your financial skills. Banks need to look for ways to minimize the risk of companies defaulting on loans. Poor personal credit of the owner is a red flag on an application. Having valuable collateral to offer can help reduce the impact of your credit rating.
As the business owner, you’re the one making financial decisions for the company. If you have a low credit score, lenders may conclude that you don’t know how to spend money correctly. On the other hand, a high credit rating is a good indicator of excellent financial management. They can see you as a good investment.
As a side note, if you have any kind of fraud or unpaid tax liens on your account, it’s almost impossible to receive loan approval. Recent bankruptcy is another warning sign that lenders can’t ignore.
How To Improve Your Credit
Even if you have poor personal credit, you can slowly improve it. Do your best to pay off existing debts and manage credit cards wisely. Check your credit scores regularly and shoot for at least 660—720. In the meantime, finance your business using alternative lending methods.