Key takeaways
- A business loan can affect your personal credit, especially if your lender runs a hard credit check during the application process or you sign a personal guarantee and later default.
- Whether a business loan impacts your personal credit depends on the loan structure, lender requirements and your repayment history.
- Some business financing options, like invoice factoring or merchant cash advances, may limit or avoid an effect on your personal credit.
It is possible for a business loan to affect your personal credit, whether through the application process or in the case of a loan default. Understanding the potential effects of a small-business loan on your personal credit can help you minimize the impact and encourage you to keep your business and personal finances separate.
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The difference between personal credit and business credit
Just like a personal credit score is a measure of an individual’s creditworthiness, a business credit score is a reflection of a business’s creditworthiness, or ability to take on and repay debt.
- Personal credit is tied to an individual’s Social Security number (SSN).
- Business credit is tied to an employer identification number (EIN).
Some of the factors that determine a business’s credit score are:
- How long the business has been operating.
- Whether there are any liens or collections in the past seven years.
- Payment history.
- Age of your open accounts.
Similarly, factors that affect a personal credit score include:
- Payment history.
- Length of credit history.
- Credit utilization.
- When you last applied for credit.
When a business loan affects personal credit
An active business loan shouldn't appear on your personal credit report, even if you’ve signed a personal guarantee. However, there are ways that business loans can impact personal credit.
Credit inquiries
During the business loan application process, most traditional lenders will pull a copy of your personal credit report — known as a hard credit inquiry.
Key points:
- Hard inquiries appear on your credit report.
- They may drop your score by a few points.
- One or two inquiries won’t have a significant overall impact.
- Hard inquiries stay on your credit report for up to two years.
- They impact your score for about one year.
Loan default
If you default on your business loan — meaning you’ve continuously missed payments, or have stopped making payments entirely — it will negatively impact your personal credit score, especially if you have personally guaranteed the business loan.
A personal guarantee is essentially a legal promise that you, as an individual, will repay the business loan if the business can’t. It effectively ties your personal credit to a business loan.
Important details:
- Most small-business loans require a personal guarantee.
- This includes unsecured loans (i.e. those that don’t require physical collateral).
- SBA loans require a personal guarantee for anyone who owns 20% or more of the business.
If you’ve signed a personal guarantee and default on your business loan:
- The lender will look to collect the payments from you as an individual.
- If you can’t pay, the lender can go after your personal assets.
- The lender will likely report the default to the major consumer credit bureaus.
- Defaults typically stay on your credit report for seven years.
- This can significantly impact your credit score and future financing options.
Business financing options that don’t affect your personal credit
There are alternative business financing options that limit the impact on your personal credit, such as business loans that don’t require a personal credit check. You may find some business loans that don’t require a personal guarantee, but these options are limited and may have high interest rates.
Invoice factoring
AltLINE AltLINE - Invoice factoring
Max Loan Amount
$5,000,000 Invoice factoring involves selling your unpaid customer invoices to obtain business capital. A factoring company advances you a portion of the money owed to you, then collects the invoice payment directly from your customers.
Because the factoring company needs to assess your customers’ creditworthiness rather than yours, it may not run a hard personal credit check on you during the application process.
Invoice financing
Similar to invoice factoring, invoice financing is a short-term business loan that uses outstanding customer invoices as collateral. Because this financing is secured by your invoices, you may not be required to sign a personal guarantee, and some lenders may not run a hard personal credit during the application process.
Invoice financing is usually fast to fund and can help cover cash flow gaps; however, it comes with a relatively high cost of borrowing compared with other types of small-business loans.
Merchant cash advances
Giggle Finance Giggle Finance - Merchant cash advance
Max Loan Amount
$15,000 With a merchant cash advance (MCA), you receive capital upfront and repay it using a percentage of your card sales, plus a fee. Because repayment is based on your sales, MCA companies may be more flexible with their credit requirements. Some companies may not run a hard check and others might not check your credit at all.
Keep in mind: These options tend to be expensive and should typically be used as a last resort.
Tips for minimizing your business’s effect on your personal credit
Taking steps to separate your business and personal finances can help minimize your business’s effect on your personal credit. It can also help you protect yourself in the event of a lawsuit.
1. Consider your business structure.
The legal structure of your business impacts the extent to which your personal finances are tied to your business operations.
- If you have a sole proprietorship, you will be held personally liable for any legal or financial problems that your business might have.
- Limited liability companies (LLCs) and corporations limit business owners' personal liability, keeping your personal credit and assets safe against business debt obligations or lawsuits.
Keep in mind that regardless of your business structure, if you’ve signed a personal guarantee and default on a business loan, your personal credit will be impacted.
2. Open a business bank account.
Having a business bank account is a good way to establish the separation between your personal finances and your business, and is easy to do with an EIN.
3. Establish business credit.
Having a solid business credit history reinforces the separation between you and your business. It also makes it easier to obtain financing without having to rely on your personal assets or credit. Registering your business, obtaining an EIN and using business credit cards can all help build your business credit.
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