HOW CREDIT AFFECT BUSINESS LOANS

When you are applying for a business loan, your personal credit will be factored into the lender’s decision to approve you or not. Business loans have subtle differences compared to traditional personal loans. They are more competitive than personal loans, and the requirements tend to be more stringent.

Even though the work-life balance is important, your personal life will be used when you apply for a loan for your business, especially if you have a small business. If you struggle with finances personally, you will struggle to get a business loan. And, vice-versa if your business finances struggle, your personal credit could be affected.

Making Decisions with Credit Scores

Stated by a credit repair expert, your personal credit score matters significantly. Many small business owners assume that when they apply for a business loan, they leave their personal financial situation at the door. This could not be farther from the truth. Before awarding you with a business loan, lenders will look closely at your personal credit situation.

They start with your credit score. This number shows whether or not you pay your bills. If you are not dependable on your personal finances, lenders will expect you to have the same behavior with your business finances. If you are a new business owner, your business credit history is minimal or non-existent. So, the only way a lender can judge you is through your personal credit history.

Other Factors That Affect Loan Decisions

Fortunately, lenders will look at other personal information before they make a final decision. Most lenders will use credit scores as one factor in their decision. And the value of the credit score varies between lenders.If your credit score is high, you might be able to qualify for a loan with a low-interest rate and longer-term. The opposite is usually true for people with low credit scores, simply because the risk needs more reward for the lender.

Lenders also look at your business history and its financial health. If your personal credit score is low, you should look for a lender that values it the least. You may be asked to put up some collateral before the lender offers you a loan.

Different Lenders and Their Typical Loans

There are several types of loans that small businesses can get. These loans have varying requirements for their small business customers.

Accounts Receivable

This type of loan requires business owners to use unpaid invoices as collateral for their loans. An accounts receivable loan places little value on credit scores, and looks more closely at the value of the business and its financial health.

SBA Loans

These are loans that rely on credit scores that are at least 680. These are backed by the Small Business Administration and given by traditional lenders like banks and credit unions. They have low-interest rates and lengthy terms. Because the requirements are so strict, they are difficult to get. Most lenders have a limited amount of SBA funds to give to small businesses each year.

Short-Term Loans

If you agree with high-interest loans and quick repayment requirements, then is a loan you might like. These look more closely at your business’s revenue, and less on your personal credit score. As long as you have cash flow, you will most likely qualify for a short-term loan.

Term Loans

A term loan is a lot like the SBA product. These are long-term loans that provide a small business owner with a large sum of money. Because so much money is often given in these loans, lenders usually require their customers to have at least a credit score of 680. They usually have fixed interest rates, but they are often higher than the SBA offerings.

Being the Borrower and Co-Signer

As a business owner, lenders might require you to guarantee your loan. As the sole proprietor, you sign the paper and your name is immediately tied to the loan. The same is true if you are a partner, too. So, if your business can no longer pay the debt, the lender will expect you to cover the balance with your own finances.

The agreement you make is almost like being a co-signer on a car loan. If the main borrower fails to pay, the lender will come to you. Only in the business sense, you are both the borrower and the co-signer. With your name on the loan, you can expect that it will show up on your personal credit report, too.

Being an Authorized User on a Business Credit Card

If you use a business credit card, you might be able to avoid putting it on your personal credit report. Business credit cards can be set up without a credit score. Instead of using it as you would a traditional credit card, you become an authorized user which is different from being a primary account holder. Despite being an authorized user, the main account might still be attached to your personal financial interests.

It is tough for small business owners to separate their personal and business finances. The best thing to do, with both your business and personal loans, is to make payments and not borrow more than you can afford.

 

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