Yes, a business loan can affect personal credit in certain circumstances, such as during the application process or in the event of loan default. That said, it can also depend on factors such as loan type or your business structure.
If you are looking to secure financing for your business and are curious about how your personal credit might be impacted by a business loan, I’ll walk you through everything you need to consider. These tips will help you lessen the potential impact on your personal credit and help keep your finances separate.
Key takeaways:
- If you personally guarantee a loan or use your personal credit to apply for financing, that may appear on your personal credit report and impact your score.
- If the loan is taken out solely in your business’s name and EIN Employer Identification Number (with no personal guarantee) and the lender does not report to personal credit bureaus, then it typically won’t affect your personal credit.
- It’s important to separate your personal and business finances to minimize potential risk and protect both parties.
Factors that determine how a business loan affects personal credit
There are some nuances about how exactly your personal credit could be impacted by a business loan. While such loans shouldn’t come up on your personal credit report, there are other factors to keep in mind.
1. Personal guarantee
Suppose you provide a personal guarantee when getting a small business loan, which essentially states that you, as an individual, are on the hook for repayment in the event a business can’t. In that case, your personal finances and credit can be tied to the business loan and have an impact on your score.
2. Hard credit inquiries
In my experience, lenders may pull your personal credit report when applying for business financing, which is known as a hard inquiry. These hard pulls will show up on your credit report and could potentially impact your score.
As long as you don’t have too many inquiries in a short period, the impact is unlikely to be severe. These inquiries can remain on your credit report for up to two years, although the impact on your credit score will have weight for about one year.
3. Loan type
Certain loan types require personal guarantees. This typically includes SBA loans, unsecured loans, term loans, and lines of credit. When working with your lender, be sure to speak with them to understand exactly what you’re on the hook for.
Some credit cards also might be able to offer flexible financing solutions for your business. Check out our roundup of the best business cards that don’t report personal credit for some options.
4. Loan default and repayment history
You’ll want to be mindful in instances of loan delinquency where you may be obligated to make payments with your personal funds if you end up in default. If you are a guarantor and are on the hook for repayment, your personal credit could be impacted if you miss a payment.
5. Business structure
In legal terms, there’s a distinction between business and personal finances if your business is structured as a corporation or an LLC. Essentially, all debts incurred by your business are tied to its entity rather than your personal finances.
However, this is not true of all business structures. If you operate as a sole proprietorship or partnership, any business loans will be attached to your personal credit report. This is because these business structures are tied to your EIN.
Tips to minimize the impact of taking on debt on personal credit
Knowing your current financial position and diligently managing personal and business finances is always a good idea. That said, here are my tips that can help you to stay on top of your finances and avoid risk to your personal credit score:
Alternatives to business loans that don’t affect personal credit
There are other ways to finance your business outside of a business loan that won’t have an impact on your personal credit. Here are some options I recommend that you consider:
- Invoice factoring: Invoice factoring allows you to sell off outstanding invoices to a third party to help free up cash flow. The provider considers the customer’s credit rather than your own, so it can be a financing solution if you’re looking for an advance rather than a loan. Check out our list of the best invoice factoring companies for some options.
- Friends & family loans: For a less formal way of obtaining financing, you may be able to approach friends and family with applicable resources to help fund your business. While you’ll still have to apply an Applicable Federal Rate (AFR), you won’t have to jump through the same hoops as a traditional bank loan. That said, you should still draft an agreement outlining the implications in the event of default. Read our guide on how to raise funds from friends and family.
- Crowdfunding: Crowdfunding a business lets you raise funds by hosting a campaign via a platform in which interested investors can donate funds for various types of returns. Generally, you don’t have to pay back raised funds, so your personal credit isn’t at risk. Our top-recommended crowdfunding sites can help you get started.
- Rollover for business startups (ROBS): A ROBS utilizes your personal finances, but maybe not in the way you think. It lets you access your retirement funds tax- and penalty-free, as long as you have a minimum investment of $50,000. However, it’s a debt-free way to help finance your business. It can be a rather complicated process, so I recommend working with a reputable provider such as Guidant to ensure you have all your bases covered. Read our Guidant Financial review for more details.
Business credit vs personal credit
Business credit | Personal credit | |
|---|---|---|
Tied to | EIN, DUNS, UEI | SSN |
Credit reported by | Dun & Bradstreet, Equifax, Experian | TransUnion, Equifax, Experian |
Credit history based on | Business finances and loans | Personal finances and loans |
You’re likely familiar with the workings of a personal credit score in that it reflects various factors that represent your creditworthiness. A business credit score is very similar in that it considers items like timely repayments, credit utilization, and the number of inquiries.
That said, there are some notable differences between the two. For instance, a business credit score has criteria that involves time in operation, liens or collections over the past seven years, and age of accounts. While this list is not exhaustive, there are varying factors taken into consideration between the two types of credit scores.
Related resources:
Frequently asked questions (FAQs)
In some cases, yes. You’ll want to apply for a loan that doesn’t require a personal guarantee or require you to have stakes that can affect your personal financials. Ensure you stay on top of your payments to avoid scenarios where the lender may have to fall to your personal finances to receive repayment. I recommend working closely with the lender beforehand to understand exactly what repayment expectations might be so that you can plan accordingly for your budget.
Only if you provide a personal guarantee and default on the loan taken out in your LLC’s name. If you offer a personal guarantee and miss payments, it will likely reflect on your personal credit report as the lender reports delinquency or default.
Most lenders won’t allow for this. Generally, the loan agreement outlines what loan funds can specifically be used for. In the event of flexible financing, such as a line of credit, there are often conditions that require funds to be used strictly for business purposes. Check out our article on business vs personal loans to help determine which is more suitable for your financial situation.
