You may not realize it, but your personal credit score matters to your small business. Lenders pull your personal and business credit score when considering applications for small business loans. Both profiles reveal information about your ability to handle credit.
Continue reading to learn more about credit scores and their impact on lending decisions.
What Is a Personal Credit Score?
A personal credit score is a number that reflects your credit history. Credit scores range from 300-850. High credit scores is an indication of healthy credit, it means that you will most likely qualify for loans with the lowest fees and interest rates. Many banks only extend credit to consumers with excellent credit.
If your credit score is not good, a lender may still approve you for a loan, but you will not be offered the most favorable terms. Prospective employers may also look at your credit score to determine your level of responsibility. A poor credit history could indicate that you are irresponsible.
Personal Credit Scores Explained
Your personal credit score is determined by the three credit reporting agencies – TransUnion, Experian, and Equifax. They collect information from your creditors, including landlords and utility companies. Based on the information, they calculate a credit score. Although the three agencies use slightly different algorithms, the typical range is as follows:
- Excellent: 800-850
- Very Good: 740-799
- Good: 670-739
- Fair: 580-669
- Poor: 300-579
Your personal credit score is calculated based on five criteria.
- Payment history: account for 35% of your credit score. Late payments, defaults, settlements, or liens are among the actions that are included in your payment history
- Credit utilization: account for 30% of your personal credit score. A high credit utilization percentage is going to negatively impact your ability to obtain financing. Maxing out credit cards or using your entire line of credit will hurt your credit utilization ratio
- Credit history length: represents up 15% of your credit score. The longer your history, the more evidence lenders have of your ability to handle credit
- Types of credit: Lenders like to see a mix of credit, such as mortgages, revolving accounts, and installment loans. Types of credit represents 10% of your credit score
- Credit inquiries: Although it makes up only 10% of your credit score, the habit of frequently applying for financing could hurt your credit score. Especially problematic are credit card applications which might indicate financial problems
Why Business Lenders Care About Personal Credit
Your success in securing small business loans is going to be influenced by your personal credit score.
- Business loan lenders have three basic concerns: Are you able to repay the loan? Will you repay the loan? Will you make the loan payments on time and in full?
- Indication of your business creditworthiness: You may believe that your personal credit score reflects how you handle your personal credit responsibility, but small business lenders view it as an indication of your business creditworthiness. If you are sloppy with your personal financial obligations, how can they know that you will not also treat your business financial obligations the same way?
- Lack of business credit history for new businesses: Many lenders and credit agencies do not regularly report business lending activity. Your personal credit score is going to be the only resource available to lenders when considering your application for a small business loan
- Lenders are particularly interested in the amount of personal debt you are carrying: Even though it is a business loan, lenders may have doubts if you are over-leveraged with personal debt. Too much personal debt could also cause lenders to worry that you might use your business proceeds to cover personal expenses
Why Poor Credit Hurts Your Small Business
- The Federal Reserve Bank of New York reports that the success rate for small businesses applying for loans is less than 50% and poor credit is the chief reason.
- A poor credit score can kill your dreams to become an entrepreneur. You need capital to fund startup costs. If your personal credit score is poor, banks or other investors may not want to extend capital
- If you need an office, retail space, or warehouse for your business operations, your poor credit score could hurt your leasing application success rates. Utility companies also evaluate your personal credit score when deciding whether you qualify to open an account
- Your credit score impacts the financing terms you are offered. You will be forced to pay higher interest rates, increasing the total amount of financing that must be repaid. This puts added stress on your long-term business financial health
- If you have a poor credit score you might not qualify for a business credit card. If you do find a carrier willing to issue a business credit card, it will come with many restrictions and a low credit limit
- A poor credit score can impact your ability to get credit from your suppliers. It helps your cash flow to have a couple of months to pay for the inventory. Suppliers usually review your personal credit score before extending credit to you. A poor credit score could prevent you from securing important inventory or equipment
Conclusion
Your personal credit impacts your ability to run a successful business. A poor personal credit score is going to impede your ability to secure loans to start a business, expand operations, purchase inventory, or cover cash flow gaps. Poor personal credit could even result in higher operating costs, so keep an eye on your score.
FAQs
Any time you apply for new financing for your business, your credit score will help determine the rates and loan terms you're offered. A high credit score can help you secure low-cost lending with favorable interest rates, whereas a low score can make it harder to find reasonable financing.
Does personal credit affect a small business loan? ›
Your credit history—both personal and business—is only one factor lenders use to evaluate your application, not the be-all and end-all of the financing process. However, credit history is an important factor, and it can have a variety of effects on your ability to acquire the financing you need.
Does my personal credit score affect my LLC credit score? ›
Having bad personal credit will generally make it more difficult to get a bank loan to start or expand your LLC. However, over time, your LLC can build its own credit which will allow you to take out loans or credit cards in the name of your business.
Does my personal credit score affect my business? ›
The way in which you conduct your personal financial affairs is not necessarily a reliable reflection of how you would deal with company finances, but if a lender sees no information of value in your business credit file, they may turn to your personal credit history to guide their decision.
Is it hard for a woman to get a small business loan? ›
No. Women and gender nonbinary business owners are eligible for the same loans as everyone else. Lenders can't discriminate against loan applicants based on gender. At Funding Circle, the right to inclusive credit access is part of our Small Business Borrowers' Bill of Rights.
Does personal credit affect LLC loan? ›
Will business lenders pull my personal credit report? Not all business lenders report loans on your personal credit report. However, all of them will pull a personal credit report to determine if you are eligible for a loan. This is often a stumbling block for small business owners applying for a business loan.
Do banks check your personal credit for business loans? ›
Lenders check business credit scores, but they will review personal credit if they can't find valuable information from the business credit.
Does LLC have credit score? ›
These scores are typically maintained by business credit bureaus. The credit score for your LLC is based on its credit history, payment history, and financial behavior, including how it manages its debts and financial obligations.
How long does it take for an LLC to get a credit score? ›
Within a three-year period, all the financial activities that are linked to a company will be part of its credit history, including its bank account, credit card use, supplier payment history, etc., as reported to the business credit reporting agencies, Equifax, Experian, and Dun & Bradstreet.
Does your EIN have a credit score? ›
While your personal credit score is tied to your Social Security number, your business credit score is tied to an Employer Identification Number — or EIN. This helps you keep your personal financial information private while you build and maintain your business credit score.
Banks generally require that you have good to excellent credit (score of 690 or higher), strong finances and at least two years in business to qualify for a loan. They'll likely require collateral and a personal guarantee as well.
Can I use my EIN to apply for credit? ›
Yes, it is possible to build good business credit scores with just an EIN, mainly using net-30 vendor accounts and small business loans or lines of credit that do not require a Social Security number.
How much does personal credit affect business credit? ›
In most cases, your personal credit will impact your business far more than the other way around. Some business credit card applications will require your Social Security Number. A landlord may want to run a personal credit check before leasing you a space. A small business loan may need a personal guarantee.
How much can I realistically get for a small business loan? ›
How much of a business loan you can get depends on your business's annual gross sales, creditworthiness, current debts, the type of financing, and the chosen lender. In general, lenders will only provide loans up to 10% to 30% of your annual revenue to ensure you have the means for repayment.
How to improve your chances of getting a small business loan? ›
A strong credit history, with a good payment track record and low credit utilization, increases your chances of approval. Another crucial factor in getting a small business loan is your business's financial health. Lenders want to see evidence of stable revenue and positive cash flow.
How likely am I to get a small business loan? ›
Securing a small business loan isn't easy for every business. Many factors are used to evaluate a business, but those with a high annual revenue and healthy credit score may have an easier time getting approved compared to a new business with a low annual revenue or poor credit score.
Do I have to have good personal credit to get a business loan? ›
You'll generally need a fair score of 600 or higher to qualify for a small business loan. However, some lenders may approve a loan if your score is as low as 500. Understanding what influences your credit score can help you improve it.
Do business accounts check personal credit? ›
Most also require a personal guarantee that says you'll repay the debt if your business fails, so your personal credit history helps issuers assess their risk. Beyond the initial hard inquiry, most business cards only report activity to commercial credit bureaus. The one exception: negative payment history.
Do SBA loans show up on personal credit report? ›
If you received a business loan, it won't appear on your personal credit report, even if you personally guaranteed the loan. However, the SBA pulls a credit report for the individual who files the business loan application, and this will appear on your personal credit report as an inquiry.
