A business loan directly affects your business credit score. That is a given. But does a business loan affect personal creditas well?If you have taken a business loan recently, you may be wondering. Well, it depends.
The type of business you run and the loan you take may affect your credit and individual borrowing capacity. How? Let’s take a closer look.
The difference between business credit and personal credit
Your credit score is a 3-digit summary of your past repayment history and indicates your creditworthiness. It generally ranges between 300 and 900, and the higher the score, the better your credit profile.
Similar to this, there is a Company Credit Report which is a record of a company’s credit history. It reveals your business’s creditworthiness.
Typically, a business is believed to be a separate entity from the individual. But do business loans look at personal credit?Well, if you own a small business, a loan is likely to affect your credit, especially if you’ve offered a personal guarantee as security. In such a case, the lender will also assess your personal credit history to determine the loan amount you qualify for.
Here are some different situations where a business loan can affect your personal credit.
1. Sole proprietorship
When starting a small business, many owners offer a personal guarantee. This is especially true in the case of sole proprietorship and partnership businesses. For a proprietorship business, your personal credit score is taken as your business credit score.
Then, does business debt affect personal credit?Since sole proprietors are personally liable for any forms of debt in the business, repayment of the business loan will directly impact your personal credit score.
A partnership business is where two or more people agree to jointly form a business. Similar to a proprietorship business, the partners are liable for any business debt. So, when you apply for a loan, the lending institution will consider the personal credit history of all the business partners involved.
3. Limited company
A limited company has a distinct legal identity, separate from its owners. Thereby making the owners free from any liability towards repaying the business loans. So, do business loans look at personal credit?Well, lenders may still ask for your personal credit history before agreeing to extend the loan.
4. Business line of credit
A line of credit works similar to credit cards, where you can withdraw funds from a line of credit loan up to a set credit limit.
If you opt for a business line of credit for short-term business needs with a personal guarantee, your personal credit is taken into account. So how you repay the loan will directly affect your personal credit score.
So, does business loan affect credit score?It largely depends on the type of your business, the business finance options, and how well you manage the loan repayment.
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