When you apply for a business loan, you can expect to answer a variety of questions about your business’s revenue, financing goals and credit history. However, what you may not expect on a business loan application are inquiries about your personal credit. A poor personal credit score may impact your ability to secure a small business loan. Learn why your personal credit is important when you apply for business financing here.
Why Do Business Lenders Ask About Personal Credit?
Business and personal credit both measure one’s relative creditworthiness, or the likelihood of debt repayment. Good personal and business credit scores can indicate that you have responsibly managed credit payments and other financial responsibilities in the past.
Very new businesses or those with a limited business credit history may not have enough payment data for lenders to make a loan application decision based on their business credit alone. Additionally, certain business structures, including sole proprietors and one-person LLCs, are not required by law to have an employer identification number or federal tax ID. In such instances, personal credit may be a bigger factor in securing business credit. Since personal credit matters when it comes to a business loan, it’s a good idea to aim for as high a credit score as you can.
What’s the Difference Between Business Credit and Personal Credit?
Business credit is similar to personal credit, but business credit bureaus are responsible for collecting and analyzing payment data in order to determine a business credit score. Personal credit bureaus exclusively collect, analyze and calculate scores for individuals.
Building business credit may involve a few additional steps for your company. New businesses or those that haven’t built a credit history may need to first establish their business credit file with the major credit reporting bureaus. On the other hand, your personal credit history generally starts as soon as you take out a loan or another form of financing, without the additional step of establishing your own credit file.
How Can I Improve My Personal and Business Credit Scores?
Personal and business credit bureaus use similar payment data to calculate your credit scores. Positive credit usage, like paying bills on time and keeping a low credit utilization ratio, can help you maintain or improve both your personal and business credit scores over time.