Does a Business Loan Affect Personal Credit?

Does a Business Loan Affect Personal Credit?

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You know what they say—it’s not personal, it’s just business. However, is that really practical, especially in the case of entrepreneurs? And more importantly, do business financing plans or loans impact your personal credit score, personal credit report, or personal credit history?

Both big and small business owners regularly run into cash flow issues, and are likely to look into lines of credit or other loan products. But are they doing this to the detriment of their personal financing, and will it affect them in the eyes of credit bureaus? Today, the financial sages behind dig into this very question. And the answers may surprise you!

Personal Credit vs Business Credit: What’s the Difference?

Here’s a brief breakdown of what personal credit and business credit, respectively, entail: Personal credit
  • Generally tied to your social security number.
  • Reflected in your personal payment and funding history (eg personal loans, student loans).
Business credit
  • Linked to your company tax ID.
  • The above rule doesn’t apply to a sole proprietor or one-person LLC.
  • In both  instances, business credit is linked to the owner’s social security number.
Businesses without Employer Identification Numbers (EINs) usually tie their loans to their own social security number. As such, they’d be personally liable when their business is unable to reconcile a debt.

Why Should I Separate My Personal Credit from My Business Credit?

When building a business credit profile separate from your personal credit history, there’s a potential to receive 10–100x more credit than if you were a consumer.  Considering how expensive it is to run a business, you’ll require this extra capacity. In fact, business owners must often utilize 10x more credit than consumers. By relying strictly on your personal credit, it’ll prove difficult to access sufficient capital to scale or grow your business.

Does Business Credit Affect My Personal Credit? 

There are two distinct ways business credit will affect your personal credit:

1. If Your Business Loan is Personally Guaranteed 

Any business loan guaranteed by an individual will affect your personal credit. Sole proprietorships tend to run into this problem due to being legally liable for debt payments. In this scenario, the lender might decide to collect personal payments when your business can’t pay off a loan.  Taking this approach turns you into a co-signer in a sense, meaning the debt has the potential to end up on your personal credit report. Furthermore, personally guaranteeing your business line of credit will affect your consumer credit history. 

2. Opening a Business Credit Card

Business credit card accounts can be set up to affect your personal credit if you’re not careful.  Company-issued business credit cards that cover your work expenses likely won’t appear on your personal report. This is because authorized business users tend to keep out of the proverbial crosshairs. Owners providing these credit cards aren’t merely authorized lenders because the account is personally guaranteed. In the event the business’s credit goes into default, the delinquency will negatively impact the owner’s personal reports and history.

How to Keep Business Debt Off Personal Credit Report

Below, we’ll highlight two ways to prevent your business debts from affecting your consumer credit.

Pick The Right Business Structure

Instead of settling on a sole proprietorship because it seems like it’s the path of least resistance, research other options. Taking pains to choose a business structure that protects your personal credit provides a financial security layer that can’t be overstated. For small business owners, an LLC is an ideal way to separate business and personal credit.  Are you unsure how to turn your sole proprietorship into an LLC? Don’t sweat it! Endless streams of helpful guides are available online. 

Speak To Your Lender

Whenever someone performs a hard pull on your personal credit reports, it decreases your credit score. Therefore, it’s wise to speak to your lender and ask them about their process before moving forward with your application. Understand the lender’s assessment policies and procedures before accepting any offers. Also, if you’re working with a lender that’s only presenting options that impact your personal credit, speak to your financial adviser about other options. 

Next Steps

As much as we’re told that business isn’t personal, there’s definitely some overlapping when it comes to loans and lines of credit. Both credit types play a role in obtaining the most optimal business funding, with lenders digging into your personal affairs to assess your business loan application. By separating personal and business spending, the two credit forms won’t impact one another. This way, you’ll have no issues when trying to secure business financing while keeping your own FICO scores in check.

Your credit score can have a big impact on your financial future. Sign up for Experian to get your credit score and credit report for free! Join millions of other Americans and get the tools you need to help understand, manage, and master your credit—in under 3 minutes. Checking your credit score with Experian won’t hurt your score.


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