Before taking out a business loan, it’s essential to know if and how your personal credit will be affected. During the decision-making process, you must become clear about how personal and business credit lines might cross in the future.
You’ll want to know how one will impact the other before completing a loan application. Talking to your lender and asking the right questions will help you to avoid problems down the road.
How Does A Business Loan Affect Your Personal Credit Score?
Ask Questions About The Loan Process
The first thing to ask a lender is to do a hard pull on your personal credit report. A hard pull will impact your credit score and remain on your report for at least two years. A soft pull won’t affect your credit score. Instead, it will give the lender a good idea of your creditworthiness and if there are any liens, tax warrants, or judgments filed against you.
You will also need to ask if loan payments will be reported to your personal credit report. It is crucial to know this because it can have a significant impact. If you take out a $200,000 loan, your credit score can take a substantial dip due to the large indebtedness.
Individual Loan Guarantees
If you own a small business and your loan request is large, you may be required to guarantee the loan. It is especially true if you do not have collateral equal to the size of the loan.
If you own a floral business and operate from a leased brick and mortar, chances are you don’t have enough collateral to back a loan. In that case, you would need to guarantee the loan, which will impact your credit score.
If your business can’t repay the loan, a lender will expect you to do so in a personal capacity. That means you risk your personal finances and credit score. When you are privately responsible for a business loan, you are acting as a co-signer.
How To Keep Your Business and Personal Credit Separate
The best way to unblur the lines between your personal and business credit is to correctly structure your company. An LLC or corporation will, in most instances, keep your personal liability at a minimum. A lawyer or accountant can give you advice about what would work best for your circumstances.
You want to do everything possible to keep your business and personal credit separate. In turn, your lender can explain all the options available. And unless your business is consistently profitable, don’t risk your personal assets, such as your home or car. If it becomes necessary to guarantee a loan, seek other alternatives before going through the initial application process.
Make sense of the role of credit and how a business loan will affect your personal score. Balance the financials and consult with a professional so as not to over-leverage the company.