Here’s a fact! Personal credit score and business credit score are two completely different things.
Your personal credit score is the measure of your creditworthiness as an individual. In contrast, a business credit score depicts your business’s loan servicing ability. Therefore, borrowers often assume that they can get a business loan without personal credit. But such is not the case when it comes to small businesses.
In this article, you’ll explore various scenarios where your personal credit score is considered during business financeapplication approval. Read on.
When does business financing approval depend on personal credit?
Let’s understand from the beginning. Firstly, a person or group of people transform an idea into a full-fledged business. In legal terms, business owners or founders and their identities are different from that of their business. However, when it comes to small businesses, the owner becomes the face of the business, and lenders review their personal credit history to arrive at a decision when sanctioning a business loan.
This is especially true when the business has a minimal history of servicing debts and is fairly new. This can also be the case for certain businesses operating for a while. If the lenders don’t find sufficient information about the company’s repayment history, they’re bound to base their lending decisions on the owner’s personal credit history.
Also, if you get a loan from a different lender, as opposed to the one your company already has relations with, then there’s a high chance that they’ll meticulously check your credit rating. Even after submitting the company’s financials, lenders may review your credit score to determine your willingness to repay the loan timely.
In many cases, the lenders want to understand your track record as a borrower, so they put the business and the founder on equal footing. When applying for a business loan, no personal credit check is not permissible in the following cases.
- Sole proprietorship: In sole proprietorships, your personal credit score is counted as your business’s ability to service loans. Since even by law, sole proprietors are personally accountable for the business’s debts. Hence, lenders will check your credit score for sure.
- Partnership business: The same rules apply if you run a business in partnership. For businesses like Limited Liability Partnerships (LLPs), owners are only liable to certain types of debt. But the lenders still examine the personal credit rating of all the partners involved.
- Limited company: A Ltd. company has its own corporate identity and isn’t liable to shareholders. But lenders can still ask for the personal credit details of the business owner and the directors.
Before applying, use a business loan EMI calculator to determine an EMI amount you are comfortable paying monthly without burdening your company cash flow. This way, you’ll apply for a loan amount you can repay.
Additional Read: Understanding Small Business Loan Rate
To sum it up
If you’re seeking a credible lender with easy-to-meet eligibility terms and flexible repayment plans, Tata Capital is here to help. With our business loan interest rates starting at 19% and easy monthly instalments, loan repayment has never been easier.