Financing a business can be difficult. Whether that’s getting access to short-term operational finance to pay for everyday expenses or securing more long-term strategic funds to help grow the business over time. Fortunately, there are many types of business loans out there to help your business gain a secure financial footing, aimed at businesses in different stages of their life cycle. But one of the big questions that business owners and directors often ask is does applying for a business loan affect your credit score in a personal sense?
The simple answer is yes, business loans can have an impact on personal credit scores. The more complicated answer is that it depends on multiple factors including the type of loan you are applying for, the way you are obtaining the credit, your business structure and several other factors. Below we’ll take a closer look at these and establish exactly how and why personal credit can be affected by business loans.
Different forms and structures of business loans will have varying impacts on your credit scores. If you are a sole trader, then your personal credit score will be directly linked to your business credit score. The same goes for partnerships, where each partner may be individually responsible for debts incurred. Limited companies are separate legal entities and in general shareholders are not liable for company debts. However, shareholders of limited companies may be required to sign a personal guarantee, leading to hard credit checks under their names, which can affect their credit scores down the line.
Lenders perform credit checks when businesses take out loans, which can be either ‘soft’, which will not have an impact on credit scores, or ‘hard’, which can lower your score. As such, it’s worth knowing what kind of credit checks will be carried out. In addition, multiple hard searches carried out in a short time can be a sign of financial distress, so this is worth bearing in mind if you have been rejected for a loan and are considering another application.
Many business loans are secured against collateral, such as business assets, providing the lender with some form of financial guarantee if the terms are not met. However, some types of loans including unsecured loans and working capital loans do not require this capital but may come with the need for a personal guarantee. These kinds of guarantees may appear on the owner's personal credit report, affecting their score if payments are missed.
As highlighted above, hard credit checks and unsuccessful applications can negatively impact your personal credit rating. That’s why using eligibility checkers before applying to gauge your approval chances can help avoid a negative impact on your credit score.
Maintaining both personal and business credit scores in a healthy state is crucial for securing loans and reducing negative effects from rejected SME business loan applications. As personal credit can be impacted in a negative way, it’s always worth understanding the exact conditions of any application and researching how your personal situation might be affected.
So, do business loans affect credit score? Yes, they do, but that is not the whole story. Check your eligibility for a business loan or get in touch with our team to speak to us about small business finance and the impact on personal credit.
Image Source: Canva