Business Insights

Good Personal Credit is the Key to Getting a Business Loan

When applying for a personal loan, lenders will check your personal credit history. If it’s a business loan you’re after, both your personal credit history and your business credit history matter to lenders.

Get to know the differences between business and personal loans, and which one might be best for you.

Before you borrow money to start or grow a business, it pays to understand how your credit history will affect your chances of getting either a personal loan or business loan.

It can be harder to obtain a business loan than a personal loan. One thing both loan types have in common is that lenders take your personal credit history into account. When applying for a personal loan, lenders will take a look at your personal credit history. If it’s business financing you’re after, both your personal credit history and your business credit history matter to lenders.

It’s Not Just Business (It’s Personal, Too)

Make sure to check your personal credit report before applying for a loan so you can dispute errors or take care of overdue bills or forgotten debts. You can dispute inaccuracies online at annualcreditreport.com, and though the process may take some time. “By law, the contested information disappears from your report pending verification,” says Mike Sullivan, a personal finance consultant with the nonprofit credit counseling agency Take Charge America.

A pattern of late payments diminishes your chances of getting a loan on decent terms, Sullivan says, but the worst personal credit smudges as far as lenders are concerned are loan defaults, debt settlements, and bankruptcy.

It takes time and discipline to mend damaged credit, “but with each passing year, any negatives on your report diminish in impact,” Sullivan says.

Business loan applications require more documentation and are generally harder to get. Check your business credit report with the three business credit bureaus, Dun & Bradstreet ©, Experian©, and Equifax™. Since part of the report is collected from public records, mistakes and mix-ups aren’t uncommon.

Besides correcting errors, you can improve your business credit in other ways. You can demonstrate creditworthiness through consistent, responsible use of a business credit card or through lines of credit with suppliers and vendors, provided they report good credit behavior to the bureaus. And though paying your creditors on time isn’t enough to earn you a perfect business credit score, your score may benefit if you pay bills early.

Your Assets are on the Line

When taking out a business loan, you may still need to provide a personal guarantee of payback, which would put your personal assets at risk.

“That’s one reason a lot of people who are self-employed or entrepreneurs don’t ever deal with business loans. They’re personally on the hook no matter what happens, and a personal loan is easier to get,” Sullivan says.

The downside, though, is that using personal credit for capital does not build business credit, so it’s even harder to qualify for business loans down the line.

Your accountant and financial advisor can help you decide which type of loan is best and how to leverage your credit to get favorable terms.

Read more about small business loans.