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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. Ready to Apply? Learn more about business loans by looking at the top-rated companies and their offerings. Explore Your Options
Guest Post by Kali Geldis There are more small business financing options available today than ever before, but small business owners need to be a little more savvy than they were a few years ago, when the bank around the corner was the one-stop choice for a small business loan or line of credit. Although a traditional bank loan, a line of credit, or an SBA-guaranteed loan might be the first thing that comes to mind when a business owner is looking for financing, they aren’t the only choices. Depending on your situation, there are other options worth considering. Let’s talk about three little-known financing options for business that are worth considering. If not “little known,” it's safe to say these options are often overlooked and underappreciated by business owners as a reliable source of borrowed capital. Trade credit Payment terms from a vendor and supplier might not be a $100,000 small business loan; however, they are powerful ways to leverage credit and start building a strong business credit profile, particularly for a new business Early-stage businesses struggle more to access borrowed capital than just about any of their more mature counterparts. Lenders want to see a track record of good credit practices that aren’t there yet, revenues that haven’t had a chance to flourish, and cash flow that simply isn’t consistent enough to support periodic payments. Fortunately, trade credit (or vendor credit) is often available to most businesses that request it and helps demonstrate how they can responsibly leverage credit to build a healthy and thriving business. Before you apply for trade credit, make sure you do the following: Confirm that the vendor or supplier will report your credit history to the appropriate business credit bureaus. If they don’t, you might be successful at building a strong credit history with that particular vendor, but it won’t help you build a strong profile. Whether or not they report to the credit bureaus might not be the most important criteria when choosing a vendor, but it’s certainly up there. Make every invoice payment on time. The business credit bureaus look at the credit relationships you have with your suppliers in the same way they look at your history with any other type of small business financing. Making timely payments is the single most important thing you can do to build a strong business profile, so you have access to other types of credit in the future. Take advantage of any early payment discount terms that might be offered. I know of more than one small business that is able to augment their payroll expense every month by taking the 10% discount offered if they pay in 10 days as opposed to paying in 30 days. Business credit cards Although business credit cards are very popular among small business owners, don’t overlook their value as an easy and convenient way to access borrowed capital simply because they are so familiar. Most businesses that offer products and services to other small businesses accept credit cards, and many utility companies will allow you to make payments with plastic too. Business credit cards also offer another easy entry into business credit for early-stage businesses. The qualification criteria is much less strict than a traditional loan application, you only pay interest on the amount of credit you use, charges are itemized in your monthly statements making it easy to monitor and control spending. And spending limits will likely be increased over time as you demonstrate that your business will meet its credit obligations.. Depending on the business card you choose, many offer cash back on purchases, points for office supplies, or mileage and other travel benefits for business owners who need to travel as part of their business. Friends and family According to the Gardiazio Business School at Pepperdine University, 19 percent of the businesses they surveyed in 2019 for their 2019 Private Capital Markets Report looked to financing from friends and family for borrowed capital. This has been a pretty consistent number over the years, making loans from friends and family one of the most popular ways for both new and more mature businesses to borrow. Borrowing from a relative might not be the first choice for most entrepreneurs and certainly has risks — an awkward Thanksgiving dinner or family reunion to name a couple of them — but if treated right, it is an option worth considering. Here are a few tips for making a loan from a family member or old college roomate work: Don’t treat things casually. Formalize things with a contract that spells out your payment obligation including payment amount, payment frequency, and what happens if you miss a payment. Keep track of every payment and regularly report on the balance and status of the loan. Even though they might be a friend or a family member who loves you, make sure you are regularly communicating with them so they know you are serious and intend to repay the entire loan amount. Be prepared for some occasional unsolicited advice. It’s safe to assume they will be more invested and interested in your business now that they have some of their own money on the line. The takeaway For many business owners, borrowed capital is how they fuel business growth and fund other initiatives to build a healthy business. When looking for financing, don’t overlook options that might not equate to a lot of cash, but certainly offer a lot of value. If you can creatively utilize smaller amounts of money to create bigger results, your business will be in a better position to respond to changes in the marketplace and have greater flexibility to meet your customer demands, all while maintaining a solid bottom line. Afterall, it’s creative problem solving that is the skill that sets the most successful small business owners apart and allows them to create wildly successful products and unrivaled services to meet their customers' needs. Kali Geldis has a decade of experience guiding individuals through the confusing world of credit and finance. She serves as the Editorial and Marketing Director for technology company Nav.
Guest Post by Elizabeth Aldrich If you don’t know your business credit score, you’re not alone. A survey conducted by Nav shows that almost half of small business owners don’t even know that business credit exists.That oversight doesn’t mean that business credit scores aren’t important. A good business credit score will get you the best business loans and lines of credit, while a bad one will bar you from borrowing money at all. Given that a lack of growth and cash flow were revealed as the main obstacles facing small business owners in the Nav survey, it’s clear that access to low-cost funding options a necessity for business owners. What is a business credit score? While your personal credit score looks at your relationship with credit, your business credit score looks at your business’s relationship with credit. A number of credit reporting agencies calculate business credit scores, including Equifax, Experian, and Dun & Bradstreet, and each has its own scoring method. Your business credit score can range from 0 to 100, although if you’re just starting out and have never used a business loan or business credit card, you might not even have a business credit score. Why a good business credit score matters Many business owners don’t think they need to pay attention to their business credit score. However, even if you don’t plan to borrow money for your business right now, you should still know your business credit score. Here’s why: It helps you qualify for the best small business loans.As your business grows, a small business loan is a quick and effective way to support that growth. It allows you to invest in more capital and scale your business without being beholden to outside investors. However, you’ll need a good business credit score to get approved for the best rates on business loans. It can provide access to emergency funding.From equipment failure to lawsuits, it’s not uncommon for a business to face unexpected expenses. If your business is ever in need of fast cash, borrowing money might be your only option. When this is the case, a good business credit score can come to the rescue, allowing you to qualify for the best business loans and lines of credit. It convinces others to trust your business.Unlike your personal credit score, your business credit score is public information that anyone can look up. Vendors and suppliers can look at your business credit, and a good score makes them more likely to do business with you. It can help you earn credit card rewards.If your business spends a lot, you might as well be rewarded for it. A good business credit score can help you qualify for the best business credit cards, and many of them offer lucrative rewards in the form of cash back or travel points. How your business credit score is calculated Each credit scoring agency calculates your score differently, but the following factors are typically considered: Credit accounts Credit accounts under your business name, such as business loans or business credit cards, are a main determining factor in your business credit score. Credit scoring agencies will look at the following factors: Payment history — On-time payments will help you build business credit while missing payments can tank your score. Length of credit history — If your business has been using credit for a long time, it’ll be easier to build a good business credit score. On the other hand, if you’re just starting out, you might not have a business credit score at all. Credit utilization — Bumping up against your credit limit regularly will likely decrease your credit score. Instead, you want to maintain low balances on lines of credit like business credit cards in relation to your credit limit. Number of credit lines — Showing you can juggle multiple lines of credit responsibly is more likely to boost your score than only having one line of credit. Collections information If you fail to pay your business’s bills (rent, electricity, etc.) on time, those missed payments can be reported to the agencies that determine your business credit score. Furthermore, unpaid accounts can be sent to collections if left overdue for a long time, at which point your business credit score is likely to take a severe hit. Public records Any judgments made against your business in court, liens, or bankruptcies will show up on your public records. These are also used to calculate your business credit score.The following factors can also influence your business credit score: Length of time you’ve been in business Your business revenue Your assets Your industry’s risk level How to check your business credit score If you don’t know how to check your business credit score, it’s fairly easy. You’ll want to get your score from each of the three main business credit scoring agencies by contacting them at the links listed below. Dun & Bradstreet — Purchase your business credit report online or call (844) 238-1514 Equifax — Contact them online or by phone at (866) 519-4800 Experian — Get your business credit report and score online The bottom line Knowing your business credit score helps your business plan for the future. Once you have your business credit report in hand, you can take several steps to improve your business credit score, from opening a business credit card to decreasing your current debt levels. Don’t let a bad or nonexistent credit score get in the way of your business’s growth.Elizabeth Aldrich is a freelance writer covering personal finance, business, and travel. Her writing has appeared in The Motley Fool, Business Insider, Yahoo! Finance, LendingTree, Student Loan Hero, FOX Business, and more.
Guest Post by LendioAccording to Forbes.com, personal credit scores are “algorithms that attempt to predict whether or not you will repay your obligations in the future.” These algorithms consider numerous factors, such as the promptness of your bill payments and whether you pay your monthly credit card balance in full (opposed to the minimum).Also, it’s worth pointing out that your personal score is separate from your business credit score. While the two share some common DNA, your business score is based on elements specifically related to the running of your company, such as your number of trade experiences, payment history, and outstanding balances. The value of your credit score Your personal credit score can be worth its weight in gold. For example, a strong score helps you qualify for better rates on a vehicle or home loan, which can save you thousands of dollars. And, most importantly for entrepreneurs, it can open the door for the capital you need to reach your business goals.The good news is that credit scores are rising nationwide. Research shows the average FICO Score is now above 700. Surprisingly enough, there are more Americans right now with scores above 800 than there are below 600.Wherever you fall within that point range, you can put your personal credit score to work to secure financing for your business. As with vehicle and home loans, the higher your score, the more favorable the terms will be. And some loan products on the market are quite lenient when it comes to your score, making them ideal for those who are new in the business or have a less-than-stellar financial history.Here are a few examples of loans where your personal score can help you with qualification, even if your score isn't high enough to impress anyone other than your mother: Merchant cash advances When speed is of the essence, this type of financing can be hard to beat. That’s because a merchant cash advance allows you to borrow against your business’s future earnings, meaning you won’t need to deal with mountains of paperwork detailing your financial past.Merchant cash advances can range from $5,000 to $200,000, and you can often get that money in about 24 hours. Because approvals are based more on the performance of your business than your personal financial history, people with low personal credit scores can often qualify as long as you’ve got at least $2,500 in monthly credit card transactions. ACH loans Similar to a merchant cash advance, an ACH loan is predicated more on your business’s finances than your own credit score. Lenders will focus on the average daily balance in your business account, then approve you accordingly.ACH loans fund much quicker than traditional loans, though the amounts are usually on the smaller side and the interest rate can be rather high. It’s worth noting that with this type of financing, the payments will be withdrawn directly from your checking account. Business lines of credit As a flexible form of financing, a business line of credit often jives perfectly with entrepreneurs who are launching a business. Similar to a credit card, a line of credit gives access to cash that you can use at your discretion. When you need money, you simply borrow (and then repay) the specific amount you need.The size of your line of credit can range from $1,000 to $500,000. And it can be used for everything from buying bulldozers to paying your employees. When it comes to qualifying, as long as you bring in at least $50,000 in annual revenue and have a credit score of 560 or above, you could be a solid candidate. Bolstering your credit score If your score isn’t quite where you’d like it to be and you’re interested in accessing a broader array of loan products, don’t worry. Credit scores aren’t a caste system where you’re locked into your current position. With discipline and strategy, you can improve your score and begin tapping into the benefits that come with it.For starters, never be passive when it comes to your credit score. Monitor it regularly and look for actionable ways to improve. You also might find errors that make you look riskier to lenders, resulting in less favorable terms and higher interest rates. Research shows as many as one in five Americans have such errors on their report.You may also want to consider partnering with a credit repair expert who specializes in repairing credit. They can quickly spot errors, identify areas for improvement, and provide multiple strategies for elevating your score. By focusing your efforts on credit repair, you could save thousands of dollars with lower interest rates, as well as having more doors swing open for you when seeking capital.Grant Olsen is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV, where his articles have generated more than 6 million page views, and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant is also the author of the book "Rhino Trouble."
The five C's of credit include: Capital, Collateral, Capacity, Character, and Conditions. Capital Capital, in general terms, is one's wealth. This wealth is determined by an accumulation of one's assets, and these assets are things like investments, homes, property, and finances. The amount of capital that a potential borrower has is important to lenders because capital has a lot to do with collateral: the more capital a person has, the more they will be able to provide for collateral. Capital is different than net worth-net worth is a person's capital minus their debts. For example: If I make $200,000 in a year and have about $50,000 locked up in investments with another $300,000 worth of property, my capital is about $550,000. Collateral Collateral is a pledge to a lender that if a borrower cannot pay their debts, the lender can take away pledged assets. Collateral protects the lender in the case a loan defaults. With collateral, they will be able to seize most, if not all, of the amount (either in financial assets or physical assets) that they lent to the borrower. As mentioned before, collateral has a lot to do with capital. Hypothetically, all of a person's capital could be used as collateral in securing a loan, though that is in most cases excessive and unnecessary. Capacity Capacity is a person's capability of paying a loan back. Capacity is calculated with a formula referred to as the debt income ratio. The ratio is: monthly debt payments divided by gross monthly income. However, monthly income does not just include salary-it is the income accumulated from financial investments as well. For example: if I make about $16,000 a month with another $1,000 monthly from investments, my total monthly income is $17,000. If I have $5,000 dollars of debt a month, my capacity (according to the debt income ratio) 29%. The lower the percentage, the better the chance of securing a loan. Character Character is the reputation of a borrower. Character can be calculated by looking at the payment history of a borrower. If the borrower is timely on all their debt payments, a lender is more likely to give them another loan. Character is also based on word of mouth-the reputation of a borrower in his or her community is also important to a lender. Conditions Conditions are the most ambiguous part of the five C's because they range greatly depending on the loan situation. Conditions can include borrowers' investment plans, business plans, terms that the lenders expects the borrower to follow, etc. Conditions tend to be more contractual than anything else. For more answers to your business loans questions, check out our Business Loans Page! (Sources: www.businessdictionary.com, www.financesformulas.net, www.bankrate.com)
It's another one of those nights: you start the day completely enthusiastic. You shower, put on your Sunday-best clothes, and think to yourself, "this is the day!" As you knock on the door, you hope against hope that this first encounter will lead to a profitable relationship . . . . . . and then you get REJECTED! No matter what you do, no matter how many doors you knock on, phone numbers you call, how much sweet-talking you do, you can't seem to engage the interest of anyone. "Is it the way I look?" you might ask. "The way I talk?" Before too long, you've decided that you're next best chance at really connecting with someone is to take your efforts online. I am, of course, referring to applying for a business loan. Though, come to think of it, applying for a business loan and dating actually have quite a few things in common: 1. Your Credit Score Is Really Important Wait. I thought we were talking about business loans and dating. Well, we are! According to The Washington Post, the quality of your credit score is actually a pretty accurate indicator of your future success in love. In general, people with higher credit scores tend to maintain longer lasting, more committed relationships than those with lower credit scores. Using over 15 years' worth of consumer data from Equifax's archives, the Federal Reserve Board surmised that people with a credit score of at least 700 at the end of the year were more likely than not to form a relationship during the following year (graphics courtesy of The Washington Post): And not only are these high-scoring couples getting together, but they are also staying together. As credit score increases, the Fed reported, the likelihood of separating decreases: The takeaway here? Having a good credit score indicates to both potential lenders and potential suitors that you know how to take care of your finances and that you are worth investing in. And as the number one problem for couples in America continues to be money, you can rest assured that seeking someone with a high credit score (while maintaining a high credit score yourself) is as good as gold. Of course, having a good credit doesn't necessarily guarantee that you'll find the man or woman of your dreams, just as it doesn't guarantee that you'll secure the exact business loan that you're looking for. But a good credit score can go a long way towards both your relationship and small business goals. 2. Both Are Worth Planning for You may have heard the saying, "a failure to plan is a plan to fail." The same could be said for both dating and applying for a business loan. Think about it: if you really want to get serious about your romantic life, would you really want to throw caution to the wind and "hope for the best"? In the short-term, it means actually planning your date ahead of time - no last-second invitations - and if you do get her to agree to a date, it's crucial you have some type of game plan other than, "watch me play video games," or "hang out for hours." According to Online Dating Magazine, failure to plan your dates in advances warrants a potential partner's automatic rejection of future dates. In the long-term, it means having an idea of where you want the relationship to go, if anywhere; you don't have to start naming your kids, but being clear about your expectations from a relationship will give you much better chance of securing one. The same things are true with business loans. Business.com warns small business owners against not being prepared for the loan application process. If you don't have a detailed business plan stating what you have to offer and what you expect do to with the money you're being lent, no one will lend to you. It's also important to present your lender with a plan for how you intend to pay that money back. Just like having a good credit score tells lenders and dating partners alike that you are responsible with your money, having a plan in place will demonstrate that you have a clear vision moving forward - and you want them to be a major part of it. 3. Flings Are Great! But They Have Consequences Whether you've seen a movie about it, or have a friend who's had one, the fling or the one-night stand remains one of the most (pardon the pun) romanticized and even stigmatized areas of the dating world. The basic idea involves a person who - either by choice or perhaps inebriation - will lower their temporarily lower their standards and their inhibitions in exchange for one night of supposed bliss with someone else. According to one statistic from Statista, nearly 60% of Americans have admitted to participating in such encounters: But just because so many people are doing it, does that mean it's worth doing? According to a study by researchers from Durham University in England, feelings following one of these encounters are generally negative. Nearly half of the women studied reported feelings of loneliness, emptiness, and even cheapness after a one-night stand; while the experience was fun in the short-term, it had some devastating long-term effects. Short-term loans can carry a comparable burden. A piece by Entrepreneur.com suggests that when you take out a short-term loan without reading the fine print, you could be paying for a lot more than you think. Interest from a short-term loan can actually compound at a much more aggressive rate than a regular business loan, especially when you request repeated extensions. So while they are great for fast cash, they can quickly get out of hand (almost as if that person you met last night turns out to be a serial stalker). The Asbury Park Press further warned against "fast, easy [short-term] loans" whose APRs can be as high as 50% or more. Unless you plan to have your short-term loan paid off in under a year, you might find yourself the victim of "unintended consequences," to put it lightly. 4. Don't Worry: There's Someone for Everyone So, after you first few rejections, you might get the feeling that you'll never find "the one." But as the song goes, you really might be "looking for love in all the wrong places." As the online dating market expands, the number of ridiculously specific online dating sites has increased. If traditional dating is not for you, you might try your luck with one of the following: Purrsonals.com - A dating site dedicated to cat lovers looking for love Amish-Online-Dating.com - A site for, you guessed it, the Amish. Although, you have to wonder what the Amish (a people who shun technology) are using to access the site. ClownDating.com - As scary as it sounds. FarmersOnly.com - "You don't have to be lonely at FarmersOnly.com." And the list goes on (and on, and on) . . . Believe it or not, there are third-party business loan sites that work very similar to these online dating sites. Magilla is one of these companies; it matches borrowers to potential lenders through its online apps. Just like with a dating app, borrowers create an online profile, answer 10 simple questions (including their business type, the amount of money they're asking for, and other preferences), and then they are given a list of potential lenders who might consider offering them a loan. So far, Magilla has connected lenders to borrowers seeking $55 million in loans! 5. Both Require Research When you think about all the social media technology out there, there really is no such thing as a "blind date" anymore. In many ways, dating has become more or less like online shopping; when we are surveying a potential partner, we study their social media profiles just like we would a product description, and dig through the comments section just like we scour product reviews. We peruse photos, interests, status updates and tweets, mutual friends, ex-girlfriends and boyfriends - all before we even meet the person face-to-face. According to an article on Mashable, one in four people send a friend request on Facebook before the first date. Long story short, we want to know as much about a person before we decide to pursue a relationship with them. Why should things be any different with a business lender? Here at bestcompany.com, we've done the back-breaking research for you. We've reviewed dozens of business loans companies using an expert-driven ranking criteria system, so you'll know who you're "getting into bed with" before you sign the dotted line.