Sustaining a business can sometimes be tricky. For any business to sustain and grow, funds are imperative. Your business can’t grow unless you finance it. Hence, investing in the overall growth and marketing expenses of the organization is crucial to get a favourable outcome. But, finding funds for more massive investments could be a challenge for many. When facing such a crisis, a business loan can be of great help. However, at times, a business loan can impact your personal credit scores. This happens when you use your own credit to finance your business. As most of the lenders depend on the credit score to approve the loan, it is essential to keep the business and personal life separate.
Business loan v/s personal credit score
The credit score is an important aspect which decides your chance of getting a loan. A Personal credit score is an overall summary of your payment habits. The credit information bureaus generate your score based on your debt repayment history. Most of the lenders require you to have a credit score of 700 and above to be considered for a bank loan for business. A good credit score can give you a chance to avail the loan with an affordable rate of interest. Like the personal credit score, there is a credit report for companies. A company credit report (CCR) records the credit history of an organization. To generate the report, banks and financial institutions submit data related to the credit history of the companies. Later, the banks use this CCR to check the creditworthiness of the companies. Hence, an unsatisfactory business credit score can create an adverse impact on your personal credit score. If you own a startup or a small business, then the lenders might scrutinize your personal credit score as well. Personal credit score and business credit score are connected. This is because a good personal credit score can give a repayment assurance for the lenders.
Types of Business that hampers your credit score
Proprietorship Business – Your personal credit score is considered as the business credit score in proprietorship business. In this type of business, there is not much distinction between the owner and the company. Sole proprietors will be liable for any form of business debt, and that can affect the personal credit score of owners.
Partnership – In a partnership business, there will be two or more individuals as owners. As it is almost comparable to a sole proprietorship, the personal credit scores of all the owners are also considered necessary.
Limited Company – Unlike other types of business, a limited company has its own corporate identity. Shareholders and directors are not precisely liable for any business debts. Still, lenders can ask the personal credit scores of owners for a business loan.