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The Impact of Business Loans on Personal Credit
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Whether jump-starting an entrepreneur’s idea or keeping operations running smoothly, there are many times when a business may look for financial guidance and lending options, traditionally a bank loan.
When applying for a business loan, it’s important to understand how the commitment and terms involved could affect your personal credit. A significant amount of business debt that affects your personal credit could reduce your ability to purchase items for personal use in the future, like a new car or home.
Learn how business loans could impact your individual borrowing capacity. Understanding the risks and benefits can help you make an informed decision while striving to reach your goals.
Concerned about Business Loan Impact?
Understand how business loans might impact your personal credit. At Porter Capital, we strive for transparency.
When Does Business Credit Impact Personal Finances?
There are many types of business loans, and they can each affect your credit if you personally guarantee your business account. Guaranteeing an account involves signing a legal contract saying you will personally repay the loan in case the business cannot do so.
Each scenario varies by circumstance. For example, some lenders make a portion of the loan guaranteed. Other lenders may require the signer to pledge their assets, such as a home, as collateral.
A lender may impose a limited guarantee with set dollar amounts if your company has one or more owners. In other cases, a clause may allow the loan agreement to convert from a limited guarantee to an unlimited personal guarantee with contingencies, like missing loan payments or falling behind on business taxes.
When Doesn’t Business Credit Affect Personal Finances?
Taking a risk for your company doesn’t have to impact your personal finances. Here are some ways to keep your business debt from affecting your personal credit:
Apply for a loan with a business EIN: If you apply for a loan with an Employer Identification Number (EIN), you’ll see the request reflected on your business credit report. If you apply for a loan with your Social Security number, you’ll see the request reflected on your personal credit report.
Become an incorporated entity: Business loans for incorporated companies like a limited liability company (LLC), S corporation or C corporation won’t usually impact personal credit. Shareholders won’t be liable for debt the business fails to pay or incurs.
Use a company credit card: Being an authorized user of a company credit card won’t usually reflect on your personal finances unless you’re a sole proprietor or partnership. Some business credit cards only occasionally submit your financial activities to reporting agencies, especially if your payments are on time.
Will a Business Loan Affect My Personal Credit?
Companies may incur debt with business credit cards, loans, credit lines, and overdrafts. These may reflect on your personal credit in the following ways:
Startups and small businesses: Lenders may require a personal guarantee to give a loan to new or small businesses because they lack credit history. Any late payments or defaults could impact your personal credit.
Proprietor business: A sole proprietor’s business and personal credit scores differ. If you’re the same entity as your company, you are responsible for paying for any debt your enterprise takes on.
Partnership business: Lenders will ask for all the personal credit information of those involved in a partnership business. If the business can’t repay its loans, the partners must clear all the debt or a percentage of overall debt in limited liability partnerships (LLPs).
Limited corporations: Shareholders of limited companies operating as separate legal entities aren’t usually liable for the business’s debts. However, lenders may request the personal credit information of owners or directors before granting the business a loan — in these cases, a business loan may affect your credit.
Bankrupt companies: A default could lead to bankruptcy of your business. In this case, creditors may turn to your personal assets and cause you to declare personal bankruptcy, which will appear on your credit reports and make it challenging to get funding if you want to buy a car or house with credit later.
How Do Business Loans Impact Business Credit?
Many small businesses use company credit cards to increase their funds for day-to-day operations. Small business loans can also affect your company’s credit score — the same is true for other loan types if you’re a larger company.
Lending companies forward your loan information to agencies for credit reporting. Your card activities, payment history and any default information go directly to the bureaus who calculate your business’s creditworthiness.
Other factors impacting your business’s credit include the company structure, business registration and operational details, public filings and historical data. Here’s a breakdown of what your credit scores may mean:
Good credit scores: A business can develop a high credit score by making payments to creditors and lenders as scheduled. Lenders trust a score showing fiscal responsibility, making it easier to secure finances in the future.
Poor credit scores: A company may develop a low credit score with late or missing payments. The lack of creditworthiness makes it difficult to secure finances from creditors or other companies later on.
How to Separate Business and Personal Finances
Keeping your business and personal finances separate starts with picking the appropriate structure for your entity. Consider choosing a limited liability, C corporation, or S corporation structure. These entities keep your business credit from impacting your personal credit.
Use a separate bank account for your business. If you apply for any company credit cards, ensure you use your company’s EIN. Understand all the associated terms, and avoid personally guaranteeing your account.
Grow a Business With Porter Capital Today
If you need flexible funding for your business, trust Porter Capital. Since 1991, our company has offered a range of funding solutions across all industry types in the United States. We provide factoring services that have no direct impact on your business credit score.
It’s easy to apply and get approved for our secure financing or invoice factoring, with payments going out as quickly as 24 hours. We keep everything transparent without any hidden fees or terms.