Can a Business Loan Affect My Personal Credit? 3 Things to Know

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If you are seeking to become an entrepreneur, a startup founder, or a small business owner, chances are you will need to look into a business loan at some point. A loan can help you take the necessary steps you need to get your business up and running, or it can act as the stimulus you need to push through a difficult time and maximize your profits. There are several different types of loans out there for small businesses, and the eligibility requirements for those loans vary. Knowing how your credit could be affected should play a factor in your research and decision making. Below you will find three key elements on questions related to eligibility and whether a small business loan could affect your personal credit.

  • Current Credit Score: Keep in mind that your current personal credit score will determine whether you get a loan at all and from whom. Suppose you’re looking at a more traditional option, like something from the Small Business Administration. This type of lender will focus almost exclusively on your individual credit and less on your business. A personal credit score below 650 is a non-starter and may cause you to look into ways to improve your credit (an altogether different article). You can find more about SBA 7(a) loan program eligibility requirements here. If you need to look at an alternative or online lender, you may have a quicker and higher likelihood of being approved, but you might also face higher interest rates and other challenges. Online lenders will often look at real-time business data to determine your eligibility instead of previous credit history. You can find an example of an online lender here. Explore as many options as you can, and find the lender that is right for you and your business.  
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  • Personal Guarantee: One of the most important things about obtaining a business loan is understanding what a personal guarantee means. Almost all lenders will require one for anyone in the business that holds a 20% or greater ownership stake, which can have serious consequences. The personal guarantee means that if your business assets are unable to cover the loan’s expense, you authorize the lender to seize any of your assets to help with repayment (to the extent of the law that they can). Plain and simple, if you can’t meet your loan terms, the lender can and will explore all options, including taking your assets to cover their expense. Your account could then go to collections and reflect on your personal credit. Make sure you clearly understand the implications of the personal guarantee before you obtain your loan. It’s always advisable to speak with a lawyer before signing anything.  
  • Personal Credit Cards vs. Business Credit Cards: One difference between personal credit and business credit is that your business is associated with your federal employer identification number (EIN) or tax id; whereas, your personal credit ties to your social security number (except in the case of an LLC or Sole Proprietorship). Another difference has to do with credit reporting policies. Your personal credit card is reported to the three major consumer credit card bureaus and occurs monthly; some business cards will also report to both the individual and commercial credit bureaus, affecting your credit. There are business credit card issuers that will only report to the commercial credit card bureaus, so if you want to keep your personal credit out of it, you might opt to go with one of them (Bank of America or Citi). The flip side to this, and a critical note, is that if you can make timely payments on your bills, and you use a business credit card that reports to both bureaus (CapitalOne or Discover), you have the opportunity to boost your credit.
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Obtaining a business loan is vital for many business owners and comes with various choices and considerations. In a perfect world, your credit score will allow you to get a substantial loan with a low-interest rate, you make timely payments, and your business will thrive. However, you should know what you could be getting yourself into if things go south. Protecting your business and your credit are both critical. Hopefully, some of this information can help steer you towards the solution that enables you to pursue greater profits and a successful business loan.  

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