It's well known that a good business credit score is essential for qualifying for small-business financing. A higher business credit score improves your chances of getting loans or financing, resulting in lower rates and more favorable repayment terms. However, it's important to note that your personal credit score also plays an important role. Most lenders consider personal credit scores when assessing business financing applications.
In this blog article from Huddle Business Capital, we delve into the relationship between personal credit and business borrowing, highlighting how your personal credit score influences your borrowing capacity. Plus, we provide actionable strategies to improve your personal credit score, which, in turn, can boost your business borrowing prospects.
Personal credit refers to an individual's ability to borrow money or obtain services based on their promise to repay the debt. A personal credit report contains the individual's name, address, date of birth (DOB), social security number (SSN), and other personal information. This report features a score that reflects a person's creditworthiness. The score is determined by factors such as payment history, total debt, credit utilization ratio, types of credit used, collection accounts (if applicable), and the number of credit inquiries.
Equifax®, TransUnion®, and Experian™—the three major credit bureaus—use both FICO® and VantageScore® models to generate credit scores based on data in the personal credit report. FICO® and VantageScore® scores range from 300 to 850, with 850 being the highest possible score. Higher FICO® and VantageScore® scores indicate a lower risk to lenders, which can improve your chances of being approved for business funding.
As we mentioned earlier, most lenders evaluate both personal and business credit scores to assess the risk of lending to a business owner. Specifically, both scores are evaluated during the underwriting process for Small Business Administration (SBA) loans and other government-backed financing programs. In addition, most business credit card issuers also review both personal and business credit scores. Personal credit is also taken into account when a personal guarantee (PG) is required.
It's important to understand that having a legal business structure, such as an LLC or S-Corp, does not eliminate the need for a PG or for evaluating your personal credit when applying for business financing. While most lenders can provide "corp-only" financing, this option is generally reserved for well-established companies that have a history of securing "corp-only" financing.
A strong personal credit history demonstrates financial responsibility, reliability, and the ability to manage debt effectively. Therefore, strong personal credit can be beneficial when seeking business financing from a traditional or non-bank (alternative) lending resource.
Improving your personal credit score involves a range of strategies that closely mirror those used to strengthen your business credit profile. One important strategy often overlooked by many business owners is to maintain separate bank accounts for personal and business finances. It is necessary to have separate checking, savings, and credit card accounts for each. The following are additional strategies to boost your credit score and secure business financing with better terms and rates.
Pay your personal bills on time.
Consistently paying your personal bills on time is one of the most significant factors affecting your credit score. Personal bills include rent/mortgage, utilities (electricity, gas, water), automobile payments, and debt repayments (personal credit cards, college loans, personal loans). Be aware that accounts paid more than 30 days late can negatively affect your credit score. Before seeking business financing, ensure that your accounts are current and not past due whenever possible.
Reduce personal credit card balances.
Paying down your personal credit card balances can help improve your personal credit score. If you have several credit cards, it might be wise to prioritize paying off the card with the highest rate or the largest balance first. This approach can save you money in the long run.
Don't use personal savings and credit for business needs.
Make a point of always using your dedicated business accounts (savings, checking, credit card) for business expenses, and never use your personal accounts. Keeping them separate enables you to build both your personal and business credit profiles and makes tax filing easier, as well.
Keep your personal credit utilization ratio low.
When you rely heavily on credit, it signals to lenders that you may be overextending yourself financially. This can raise concerns about your ability to manage debt responsibly. To maintain a healthy credit score, keep your personal credit utilization—how much credit you're using compared to your total available credit—below 30%, as recommended by financial experts.
Avoid maintaining high-debt accounts.
Maintaining high balances on personal credit cards, personal loans, and other types of debt can hurt your personal credit score. To protect and improve your credit score, keep your credit card balances low, pay off loans promptly, and manage your overall debt responsibly.
Limit the number of credit inquiries you make
Each time you apply for new credit, a hard inquiry is recorded on your credit report, which can temporarily lower your score. Frequent or excessive inquiries can be a red flag for lenders. To avoid a hard inquiry when applying for business financing, consider a lending resource that performs soft pulls, such as Huddle Business Capital. Soft pulls do not impact your credit score.
Take steps to address any collections or charge-off accounts.
If you fall behind on payments on any of your credit accounts, your account may be placed in collections, or the debt may be "charged off." In either case, these situations will hurt your credit score and limit your ability to borrow for your business. If you have one or more delinquent accounts, be proactive and take steps to prevent further action.
Don't forget to monitor your personal credit report.
No matter how much time and effort you put into reducing your debt and improving your personal credit score, there might be things affecting your score that you are unaware of. These could include inaccuracies, forgotten outstanding debts, or fraudulent activities. So, request your personal credit report from one of the three major credit bureaus—Equifax®, TransUnion®, and Experian™. You can easily do this by visiting their websites online.
This Huddle Business Capital blog article is purely educational and contains general information and opinions; it is not intended to provide advice or recommendations of any kind. Huddle Business Capital is not affiliated with nor endorses the companies mentioned in this article.