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Does a Business Loan Affect Your Personal Credit Score?

Can Business Loans Affect Personal Credit?
Lauren Ward
Lauren WardUpdated January 21, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
As you grow your business and seek financing opportunities, you may wonder if taking out a business loan could affect your personal finances. In other words, could a loan for your business have an impact on your personal credit score?The answer is, yes, in some cases, it could. A business loan may impact your personal credit score if you run a sole proprietorship or partnership. It may also impact that score if you personally guarantee the business account in any capacity.Read on to learn the different ways in which a business loan can affect your credit scores, and what you can do to keep business financing separate from your personal finances.

What Is Business Credit?

Business credit is your business's ability to borrow. As access to cash and credit is a business's lifeline,  business credit will allow a company to borrow money that can be used to purchase these goods and services. Similar to your personal credit score, your business credit score is an estimation of your company’s creditworthiness. A poor score can negatively impact the ability to secure low-cost business financing. A better score, on the other hand, can help your business get loans with better rates. As the Small Business Administration(SBA) says, business credit “is based on the trust that payment will be made in the future.”

How Does Business Credit Work?

Your business credit score is determined using information from a business credit report. That report includes company details like the number of employees a business has, past payment history, account information, and the amounts earned.

Difference Between Personal and Business Credit

You may be wondering, “Does my personal credit affect my business credit?” The lines can get blurred with business credit vs. personal credit. Your personal credit score is linked to you through your social security number and uses information drawn from credit reports. The score reflects your funding and payment history, such as your use of credit cards or your record of paying a student or personal loan, and can affect your access to future credit and what interest rates you pay.  It may be looked at by landlords and potential employers.A business can have its own credit score, so long as it is a separate legal entity with a federal employer identification number (EIN). If you’re trying to get a business loan, some lenders may examine only your business credit history, which is reported by three major business credit bureaus: Experian, Equifax, and Dun & Bradstreet. But sometimes your personal credit history can prove relevant, such as a large amount of personal debt..

What Types of Business Activities Can Affect Personal Credit?

So does business credit affect personal credit? It’s complicated. Business credit can influence your personal credit depending on a few factors, such as how long you’ve been in business and your business activities. 

Business Credit Card Use

Credit cards taken out in the business’s name or EIN will affect its history with credit and, therefore, its credit score. But will it cross over to your personal credit profile?When you apply for a business credit card, the lender will typically perform a hard credit inquiry into your personal credit. But every hard credit pull can potentially lower your personal credit score by a few points, so be prepared to see a dip.Once you’re using your business credit card, some activities will affect both personal and business credit scores, while others will influence just your business score. It all depends on what the credit card issuer chooses to report. 

Most Business Debt

Business debt can affect your personal finances in all sorts of ways. For example, being held personally responsible for a business loan puts you at a disadvantage when applying for a personal mortgage. It can present a challenge in  getting it approved or securing the best interest rate. Recommended: Applying for a Small Business Loan in 6 Steps 

How Can Business Loans Affect Personal Credit?

A business loan can affect your personal credit score in a variety of different situations. If your business doesn't have an EIN and the loan is tied to your social security number, for example, you would be liable for any debts if your business fails and is unable to repay them.Failure to make timely payments would affect your personal credit score.Another key scenario in which business loans can affect personal credit scores is when the borrower signs a personal guarantee. With a signed personal guarantee, both your credit score and your business’s credit score may be affected by missing payments. A personal guarantee also puts your personal assets at risk. Recommended: Common business loan terms

What Are Personal Guarantees?

When starting a small business, owners often personally guarantee loans. When you sign a personal guarantee, you’re promising to pay back any credit issued to your business. Should you fail to make any payments, it will likely first be your business’s credit score that takes a hit. If the loan goes into default, the damage may then spread to your personal credit profile. Plus, if you secured the credit with any of your personal assets, then those assets may be seized by the lender.Keep in mind that this does not mean the lender isn’t going to look at your business’s financials simply because you sign a personal guarantee. However, it does mean you may get better terms. By signing the personal guarantee, you are giving the lender more confidence that the loan will get repaid if it lends to you. Because of this, borrowers who sign personal guarantees often get better rates than those who do not. There are both pros and cons to signing a personal guarantee. Here’s a look at how they stack up.
Pros of Personal GuaranteesCons of Personal Guarantees
Can help a business qualify for loans, credit cards, and lines of creditIf the business can’t repay the loan, payments fall to the owner
Can help new businesses with little or no credit histories establish their own credit scoreTies the business owner’s personal credit score to the business loan, credit card, or line of credit
Can help small business owners get better interest rates and loan termsLender may seize the borrower’s personal assets if the debt is not repaid

5 Ways to Protect Personal Finances From Business Debt

If you’d prefer to keep your personal credit score separate from any business debts you incur, there are some actions you can take to help make that happen. Below are some options you may want to look into.

1. Business Structure

How your business is structured affects how banks and lenders interact with you. For example, if you’re a sole proprietor, it’s your name that will appear on every debt owed by your business, and your business and personal credit will be one and the same. Thus any late payments and defaults you accrue can have a negative effect on your personal finances.If you want to sever ties, you would need to become an LLC, S corporation, or C corporation. Each set-up comes with a unique set of tax burdens and benefits, so when choosing a business structure, it can be a good idea to consult with a tax professional or business organization lawyer.

2. Business Credit Cards

It can be hard to get a business credit card right out the gate, which is why many business owners need to sign a personal guarantee when getting one. However, you may be able to find a business credit card that does not routinely report activity to the consumer credit reporting agents. Keep in mind, though, that you need to make all payments on time. Most major small business cards will report if you default on the card. Another option may be to get a secured business credit card. A secured card uses money that you yourself deposit as collateral. This refundable deposit protects the card issuer in case of default. Like a regular credit card, you make payments on any amount you use each month. After your business has proven to be financially responsible, you can request to upgrade to an unsecured business credit card. 

3. How Are Defaults Resolved?

How a default is handled will depend on how the loan was set up. If you personally guaranteed the loan, your lender may collect any collateral you put up to secure the loan, meaning you could lose your car or house. Likewise, all missed payments will show up in your personal payment history, which can lower your credit score and make it harder for you to get a personal loan or credit card. If you or your partners did not personally guarantee the loan, then the business itself may be sued, and any business assets you used to secure the loan might be seized. You can also expect fees, interest, and penalties to accumulate, as well as your business’s credit score to take a hit. 

4. Check With Your Lender

When applying for a business loan, it can be a good idea to ask the lender whether it will look at your personal credit report and score before approving you for the loan. If so, this means the lender will be doing a hard credit check on your financial history, which could lower your score by several points.It can also be smart to review any documents and contracts that accompany the business loan. If any of them request a personal guarantee and require your signature instead of your business’s, then you know you will be held personally liable for the loan or line of credit. You may be able to challenge the personal guarantee, but if you do, the lender may deny your loan request or increase your interest rate, meaning you’ll pay more for the same product.   

5. Look for Alternatives

The financial market is quite diverse, and there are many different small business financing options you may be able to pursue that won’t affect your personal credit. For example, there are loans that borrow against your retirement plan or 401(k), but that won’t appear on your credit reports. So, even though you are borrowing against a personal asset, your credit score is not affected.

Personal Finances Affecting Business Loans

There are three scenarios where your personal finances might impact your ability to get a small business loan:
  1. Your business is structured as a sole proprietorship or partnership.
  2. Your business has a limited credit history.
  3. Your business has a low credit score.
If any of the above are true, the following may impact your ability to get a loan or your loan terms:

Personal Credit Score

If your personal credit score is low, it can have a negative impact on your business loan. It may not prevent you from getting approved, but it could keep you from getting strong loan terms. 

Personal Debt

Personal debt also has the potential to lower your prospects for being granted a business loan. If you have a lot of debt in your name, it may give lenders enough of a reason to charge you high interest rates, fearing you may one day default on payments. 

Lantern's Business Loan Rates

Does a business loan affect your personal credit? If you personally guarantee a business loan, your credit will be affected. If you run a sole proprietorship or partnership, your finances could also be affected by a business loan. In either of these cases, you may face a reduced personal credit score if your business delays payments or defaults on the loan.However, business debts don’t impact personal credit if the company and the owner are two separate legal entities.If you’re interested in investigating different types of small business loans that may be available to you, Lantern By SoFi can help. By filling out one simple form, you can immediately access small business financing options matched to your needs and qualifications.
Photo credit: iStock/ljubaphoto

Frequently Asked Questions

Are business loans based on personal credit?
Do small business lenders check personal credit?
Can a business loan affect getting a mortgage?

About the Author

Lauren Ward

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
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