When you apply for a business loan, your personal credit and business credit will be taken into consideration. Even though the business credit is not meant for your personal life, it is highly likely that the bank will look closely into your personal credit history. If you have strong personal credit, your chances of building a business credit history should be high.
Business Credit vs Personal Credit
Business and personal credit are different from each other, but they can become related. When you buy a home or a car, you use personal credit. Business credit can be used to finance a vehicle for a business, and it can be used to finance a building and equipment in it. If you have problems paying for business credit, it will not affect your personal finance.
But when you are starting a business, your personal credit will be taken into consideration. However, if you already have an established business credit history, then your personal history might not be needed. Interestingly, anyone can look at a business’s credit history. This is not the case with personal credit history.
Separating Business and Personal Financial Histories
When you are a new business owner, you might think that you need to use your personal credit to help the business. This might be helpful in some cases, but it can be dangerous in others. When you put your personal credit history on the line, you could alter the debt-to-income ratio of your business. This will change the way your business is valued.
If something happens to your business and your personal credit is attached to it, you can do damage to your personal financial status. Your credit history could be harmed, leaving you with a bad credit report and unable to make personal purchases. Keep in mind that business credit reports can be pulled at any time without any harm to the business. But, with personal credit reports, this is not the case. If you have to continually use your personal credit history to finance your business, each time your credit report is pulled, your creditworthiness takes a hit.
Personal Credit Affecting Business Credit
If you are trying to get a loan to start your business, your personal credit score will be checked. It will be nearly impossible to get a loan without having your personal credit attached to it. And, you might even be asked to give some personal collateral for the loan. If your business fails and you still owe money through the loan, you will be expected to pay for it.
Your personal credit will be used by property managers, utility companies, and vendors. If your personal credit is low, you might not be able to get a retail or industrial space for your business. You might also struggle to get new equipment for your business. After your business becomes established, your personal credit becomes less of an issue.
Lenders want to be sure they can recoup their finances. So, when they give loans to new businesses, they want to be sure that their customers will be able to pay them back. This is why they look closely at personal credit before giving out business loans.
