Whether you need to satisfy operational costs, you’re looking to open a new location, or you’re expanding your inventory, there’s a myriad of reasons why you’d need a small business loan as a business owner. While lenders will review your business’s financials and credit score, they will also dive into your personal credit history.
Stated by a credit repair Austin company, your personal score is representative of your creditworthiness and in many ways, is one of the most important factors a lender will take into consideration when evaluating your loan application.
Why? Let’s take a look.
Why Lenders Care About Your Personal Credit
Think about it for a second – why shouldn’t they assess your personal credit? After all, quality lenders are looking to supply loans for individuals who have a strong likelihood of returning borrowed funds. Your individual credit score gives them the added intel they need to make a fully informed decision.
There’s no business credit history for lenders to look at because sole proprietors or those with home-based businesses have chosen to finance their business using credit cards or personal bank accounts.
Similarly, your business may be in the start-up phase and you just haven’t had the opportunity to develop an extensive business history.
Startup business loans can be troublesome to obtain because the interest rates are often astronomical. However, as you build and demonstrate a strong credit history (even if it’s your personal credit), these types of loans are much more attainable.
Lastly, while your personal credit score will follow you throughout life, your business’s credit score remains with the business.
So, if you sell your business down the road, the new owner would inherit the score.
The Impact of Poor Credit on Business Loans
Here’s a little scenario to help you see just how influential your credit score can be when it comes to securing a business loan.
Let’s say your business is thriving. Not only have you been fiscally responsible as a business owner, but you’ve maintained an excellent business for several years now.
Because of all your hard work, you’re eligible for the best possible business loan one could qualify for – except you don’t. Why?
Due to your not-so-great personal credit score. So, the question is, how much will your personal score affect your rates and eligibility for a small business loan?
The reality is, if your personal credit score sinks below the 650 mark, especially when it comes to an SBA loan, you could have the most impressive business financials in the world and you’re still likely to get denied.
Online lenders tend to have less stringent requirements and may accept your application. However, you’ll be facing interest rates and repayment terms that’ll hurt the wallet and make you cringe.
So, you want to procure some business financing, but you currently possess a poor credit score. What do you do?
Your first step is to check your credit history for any mistakes, misspellings, or erroneous information – inaccurate data can negatively impact your score and you should right those wrongs as soon as possible.
From there you want to start taking steps to improve your financial picture, such as paying bills on time, keep your credit card spending 30% below the limit, and paying off any debts you may have.
When applying for a small business loan, you want to present the strongest case possible for why a lender should approve your application and present you with good rates. Credit issues not only affect your personal life, but they can really influence your business as well.