Do Business Loans Affect Personal Credit?

You may make every effort to keep your personal and business finances separate, including registering your business as an LLC with its own TIN and using another bank account for all company finances. But would these measures guarantee that your personal finances are completely safe?

It turns out that securing financing for your business can impact your personal credit score. While it should be your goal to protect yourself as much as you can from any financial shortcomings of your business, some lenders make this pitfall inescapable.

Read on and learn how business loans affect personal credit.

How would a business loan affect my personal credit?

If you’re a growing business without a substantial financial history, or if you choose a type of loan that lenders consider high risk, you’ll likely have to furnish more personal information in an application and could be susceptible to an impact on your credit score.

Your personal credit can be affected by business loans in a few ways:

• Hard credit inquiries
• Personal guarantees
• Lenders reporting to personal credit bureaus

Hard credit inquiries

To start, some lenders will check your personal credit score alongside your business credit score if you lack a financial history for your company. “This credit check, called a hard inquiry, can slightly lower your credit scores,” says Greg Mahnken, credit industry analyst for Credit Card Insider. “Generally speaking, as long as you aren’t applying for a lot of credit in a short time, hard credit inquiries won’t affect your credit by much or for very long.” 

Trouble will come if you field too many inquiries in a short amount of time, which could happen if you continuously receive rejections while seeking a business loan but move forward with applying. Mahnken warns that hard credit inquiries stay on your report for two years, so make sure you read all of the requirements for a particular product before applying and see if you can work with a company that does a soft credit pull.

Lendio is one company that performs a soft credit check when you apply, meaning the check won’t affect your score.

Personal guarantees

If you haven’t been in business long, it may be hard to get a business loan without a personal guarantee. Signing an agreement to pay a business loan out of your personal pocket (or with your personal assets) should your company be unable to pay could make you hesitate.

Some products are more likely to require a personal guarantee:

• SBA loans
• Business lines of credit
• Unsecured term loans

Loans that require a personal guarantee typically come with perks, such as better interest rates and repayment terms.

Other products are less likely to require a personal guarantee:

• Merchant cash advances
• Equipment financing

However, these products can have their own drawbacks, such as higher interest rates and shorter repayment terms.

Some companies have funding options that don’t require a personal guarantee in order to be more accessible. Fundbox offers lines of credit that require no personal guarantee.

It can be nerve-racking to think your personal credit score will be affected if you’re unable to pay off a business loan, so you might be tempted to choose a product based on this factor alone. However, keep in mind that no option is a good choice if you don’t have a sound business plan, and even then, extenuating circumstances can occur. The best choice you can make is to select a lending option with great rates and terms that you are confident you can pay off with your financial planning.

Lenders reporting to personal credit bureaus

Lastly, check whether the lender you’re working with will report to personal credit bureaus in addition to the business ones.

“If your business is a sole proprietorship or a partnership, it’s very likely that a business loan is going to appear on your personal credit reports,” Mahnken explains. “If your business is a corporation or LLC, your lender may or may not report to your personal credit reports in addition to business credit bureaus.”

However, reporting to a personal credit bureau might not be all bad. “If you are returning a loan on time and following all terms and conditions, then FICO could go up as well,” says Bradley Stevens, founder of LLC Formations. “Otherwise, it could go down dramatically in the worst-case scenario.”

How can I prevent a business loan from hurting my personal credit score?

For the best-case scenario, you should be assessing the market need for your business and creating a strong financial plan. But it’s impossible to foresee every obstacle, so it’s better to protect your personal finances as much as possible from the start.

You can check with a lender to see whether the company performs a hard credit pull or reports to personal credit bureaus, and ask the lender which products would require a personal guarantee so you can steer clear if possible.