Applying for a business loan can be a great way to get the financing you need to grow your business. But did you know that it can affect your personal credit and may make it harder for you to borrow money for things like getting a mortgage?
We’ve put together a guide to help you understand how a business loan may affect your personal credit and your business credit. And laid out some tips on how you can keep your business credit and your personal credit separate.
The Difference Between Business and Personal Credit
Business credit works like personal credit. It provides a record of how your business manages credit and debt. And just as with personal credit, lenders and creditors use business credit to assess the creditworthiness of your business.
Business credit reports and scores are completely separate from personal credit reports and scores. And business credit scores are calculated differently from personal credit scores.
We put this table together to outline the differences between business and personal credit.
|A business credit report contains a record of your company’s history managing business debt and credit and includes a company profile.
|A personal credit report contains a record of your history managing personal debt and credit and includes your personal information.
|The three main credit bureaus are Equifax® Business, Experian™ Business and Dun & Bradstreet CreditMonitor™.
|The three main credit bureaus are Equifax®,Experian™ and TransUnion®.
|Business credit scores typically range from 0 – 100.
|Personal credit scores typically range from 300 – 850.
One other difference to note is that business credit scores are a part of business credit reports, while personal credit scores are not found on personal credit reports.
How a Business Loan Affects Personal Credit
A business loan can affect your personal credit based on your business structure and your finances. The more entwined your personal and business finances are, the more a business loan can affect your personal credit score.
Also, a business loan can be based on personal credit if the lender uses it to assess your creditworthiness, especially if you don’t have established business credit history.
Keep in mind, not all lenders and creditors report payment activity to personal credit bureaus. A business loan (or any loan) will usually only affect your personal credit if it is reported.
If you are a sole proprietor, you may not have business credit history if your credit reports are tied to your Social Security number (SSN), and not an employer identification number (EIN).
Any business loans you take out will likely have an impact on your personal credit score if you’re operating as a sole proprietor with no EIN. In this case, the sole proprietor would be viewed as the business. This means you will ultimately be responsible for repaying the business loan and your payment activity will likely show up on your personal credit report.
A partnership is when two or more individuals own a business together and each partner contributes to all aspects of the business. Just like sole proprietors, you may not have business credit history in a partnership if your credit reports are tied to your SSN, not an EIN.
This business structure will likely have a large impact on your personal credit scores because the partners are viewed as the business. Partners will be responsible for repaying loans if the business can’t and payment activity will likely show up on each partner’s credit reports.
If you have a limited liability partnership (LLP), partners will only owe a percentage of the outstanding debt if the business can’t repay the loan.
Limited liability companies (LLCs) and corporations
Unlike the previous business structures, LLCs and corporations (like an S Corp or C Corp) are legal entities that are separate from their owners. Your business EIN is used to apply for loans, which means owners and shareholders aren’t personally responsible for business debts unless a personal guarantee was signed (more on this later). So, if your business can’t repay the loan, your personal credit shouldn’t be affected.
While business loans may not always affect personal credit with LLCs or corporations, a lender may decide to review your personal credit to see if they want to give you a loan.
Situations When Business Loans Affect Personal Credit
There are a few situations when a business loan will likely affect your personal credit.
No matter what business structure you have, business loans can affect your personal credit if you personally guarantee a loan. A personal guarantee is an agreement signed by a business owner to take personal responsibility for repaying the loan if the business can’t.
If your business defaults on the loan, the lender has the authority to request payments from you. At which point, the payment activity can show up on your credit report.
If you are a co-signer on a business loan, a loan default can be reported on your personal credit report.
If you use personal financing (like a personal loan or home equity loan) for your business, it can affect your personal credit. Since you are the one who took out the loan, it will show up on your credit report.
If you don’t have the funds to repay the loan, legal action (like going to court) can be taken, lenders and creditors may seize personal assets (like your home or property) or you could end up filing for bankruptcy. All of which can affect your personal credit.
Who is responsible for business debt?
If you are personally responsible for paying off business debts and you can’t pay them (aka insolvent), you’ll likely have to sign an agreement to work with an insolvency company.
As a sole proprietor or partner in a partnership, you’ll sign an individual voluntary agreement, working with the insolvency company to make periodic payments that the company divides between your debt accounts to pay them off.
As an LLC or corporation, you’ll sign a company voluntary agreement, but the repayment process works the same as an individual voluntary agreement.
If you still aren’t able to repay your debts, you may need to file for bankruptcy.
Situations When Business Loans Don’t Affect Personal Credit
If your personal and business finances are kept separate, it’s likely a business loan won’t affect your personal credit unless you signed a personal guarantee. This means that owners of LLCs and corporations probably won’t see business loans showing up on their personal credit reports.
If you used business assets to secure a loan, your personal credit likely won’t be affected if you default.
How a Business Loan Affects Business Credit
When you apply for business financing using an EIN, your business is tied to the loan, not you as the owner. This means your payment activity will likely show up on your business credit reports (not your personal credit reports) and influence your business credit scores.
Remember, not all lenders and creditors report payment activity to business credit bureaus, so a loan will usually only affect your business credit if it is reported.
The more positive business credit history you have and the higher your business credit scores are, the better your chances are of getting financing.
How can you build business credit?
If you want to build business credit to get better financing options, there are some steps you can take. Just make sure that when you’re choosing financing options, the lender or creditor reports to the business credit bureaus.
- Incorporate: When you choose to establish your business as an LLC or corporation, a separate business credit profile is created. You can apply for an EIN with the IRS. When you apply for financing, you’ll use your EIN.
- Open accounts: Apply for a business credit card, a business line of credit or a business loan using your EIN. Only borrow money if you need it and make sure you manage your accounts responsibly by making on-time payments.
- Establish tradelines: Establishing tradelines (a fancy way of saying accounts) with vendors and suppliers is another way to build business credit. Like any other account, make payments on time to build positive credit.
Make sure you’re monitoring your business credit reports often. Errors can cause unnecessary drops in your credit scores or imply fiscally irresponsible behavior.
Can Personal Debts Affect Business Loans or Credit?
If business debt can affect personal credit, can personal debt affect business credit? The short answer is yes.
If you own a small business, your personal credit and debt can affect your chances of getting a business loan. Since lenders usually run a credit check of your personal credit history when you apply for a small business loan (especially if you are a sole proprietor or partnership that doesn’t have an EIN), any information in your personal credit reports can affect a lender’s decision.
Having bad credit, high credit utilization or a lot of personal debt can decrease your chances of being approved for a small business loan. On the other hand, having good credit, low credit utilization or low amounts of personal debt can increase your chances of being approved.
Tips for Keeping Business Credit Separate From Personal Credit
If you want to keep business finances, debt and credit separate from your personal credit, there are some things you can do to accomplish this.
- Business structure: Choose the right business structure that works for you, but remember, an LLC or corporation limits your personal liability for any business-related debt or lawsuits.
- Loans: Apply for business loans using the business EIN instead of your SSN. When you use your EIN, the loan is tied to your business, not you.
- Credit cards: If you’re choosing a business credit card for financing, look for one that doesn’t report to consumer credit bureaus. Make your payments on time as some creditors may report defaults to personal credit bureaus.
- Consult the lender: Talk with a lender or creditor to see if they’ll require you to sign a personal guarantee for a loan, whether they report to credit bureaus (both business and consumer) and if they will check your personal credit or not.
Remember, no matter which business structure you choose, if you personally guarantee a loan, it will be tied to your personal credit.
A business loan can affect your personal credit if the loans are tied to your SSN and show up on your personal credit reports.
Business loans won’t affect your personal credit if you applied with your EIN, not your SSN, or you have an LLC or corporation, which would make your business a separate legal entity. Unless you signed a personal guarantee for a business loan, it won’t affect your personal credit.
It can be risky business to tie your business and personal credit together, but if you’re managing your debt responsibly, it can have positive effects on your personal credit.
The Short Version
- A business loan can be based on personal credit if the lender uses it to assess your creditworthiness, especially if you don’t have established business credit history
- No matter what business structure you have, business loans can affect your personal credit if you personally guarantee a loan
- Business credit reports and scores are completely separate from personal credit reports and scores