Is a Business Loan Tied to Your Personal Credit?

Learn how taking out a business loan can affect your personal credit score and what steps you can take to ensure that it doesn't have an adverse effect.

Is a Business Loan Tied to Your Personal Credit?

When it comes to taking out a business loan, it's important to understand how it can affect your personal credit. If you personally guarantee the loan, then your credit score will be impacted. This is especially true for sole traders and companies, as their finances are directly linked to the loan. If payments are delayed or not met, then your credit rating will suffer. When you apply for a business loan, lenders will take a look at your personal credit score.

This helps them to get an idea of your financial situation. Even if you're just starting out, this doesn't necessarily mean that the loan is tied to your personal credit. For example, if you apply for a business credit card, then a thorough credit check will be done on your personal credit score, which could lower it by a few points. Additionally, lenders may continue to make inquiries into your personal credit when you apply for additional cards or small business loans. Your personal credit is linked to your Social Security number, which is the one you would use when applying for a loan if you are a sole owner or partner in a company.

In these cases, business debt, business credit cards, or financial activity won't have an effect on the business owner's finances. It may be beneficial to have an open discussion with your lender about whether they will regularly review your personal credit history for repayment plans or business loans. This could depend on factors such as the structure of your company and whether it has its own credit rating. When a company's finances affect personal credit, the impact can be long-lasting on its credit rating. So before you apply for a business loan, make sure you understand the potential impact it can have on your individual borrowing capacity.

A company with an EIN number will begin to build up its own credit history once it engages in debt financing and establishes a track record of performance. If your company is struggling to make repayments, then contact your supplier as soon as possible and try not to fall into multiple late payments. Like with personal ratings, your company's credit rating rises and falls depending on the length of credit, utilization rate, payment history, and other factors determined by business credit rating agencies. The best way to improve your credit is to use your cards responsibly, whether they are business or personal cards. And if you have a business card, then it's also wise to check your business credit score. Generating business credit or improving a company's creditworthiness is similar to creating or improving personal credit history.

The advantage of companies that operate this way is that your personal credit won't be tied to your business.