It is a well-known fact that an individual and a business are two separate entities. The personal actions of an individual do not have an impact on the business. In the same manner, the business credit score and an individual’s personal credit scores are different. It is often assumed that the personal credit score will not have any impact on a business loan. This might not be true in all cases. Here is how your personal credit score has an impact on the business loan.
Any business is always started by a person or a group of people. When the company at the preliminary stage and is devoid of any credit like loans, then the credit score of the owners will be considered. The lender will rely on the individual’s credit score before making a decision to approve or reject the application. Often, the lender is unable to find adequate information about the company and they base their decision on the personal credit score of the founders.
Types of business that determine whether the personal credit score is crucial
Listed below are different types of businesses where the personal credit score plays a pivotal role to seek a business loan.
It is hard to distinguish between a sole proprietor and the business. Hence, the sole proprietor is responsible for all acts in the business and therefore, the lender will consider the personal credit score.
A partnership concern is an extension of a sole proprietorship and the owners’ personal credit scores are considered by the lender while verifying the business loan application. However, only in case of a Limited Liability Partnership, the owners are responsible for only for specific types of debts.
Private and public limited companies
In the case of these companies, the business will have a credit score, which is separate from its owners. The personal credit score of the founders will have no impact on the approval or rejection of a loan application.
Types of credit that determine if the personal credit score is important
The type of credit, which you apply for, will determine if the credit score is essential for decision-making. Some of these types are as follows:
Long-term and short-term loans
In the case of short-term loans and unsecured long-term loans, the risk is high and the personal credit score of the owner might be considered.
Personal credit scores of the owners will not be considered if the credit is for equipment financing as this type of finance is usually backed by a collateral.
This is a loan obtained against the collateral of accounts receivable. It has a low-risk involved as it involves collateral; hence, the personal credit score is not considered.
Having a good personal credit score can make a significant difference to your business loan application. It shows that you are responsible towards your financial obligations and the business.
You can use the business loan calculator for a quick estimate of the Equated Monthly Instalment (EMI) in your business loan. Input details such as the loan amount, tenure and the business loan interest rate to get an accurate result within seconds.
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