Personal credit can influence business loans. Some financing companies demand credit scores as an eligibility marker. However, is this the case for personal loans? Does a business loan affect a person’s credit score and limit their ability to get a loan? The answer to this is two-sided. While it is possible, some factors may make it impossible. But first taking into consideration the creditor’s stance is crucial. So how exactly does it work?
Business Loans May Affect Personal Credit
In an instance where a personal guarantee is required, personal credit will play a part. When seeking funding in the US, a personal guarantee is important. This happens when there is no collateral at stake, especially for Small Business Administration.
Such requirements call on the business owner to show their credit score. Once the lenders are satisfied, the business loan is approved. For business owners with low credit scores, they may be unable to secure a loan.
Using Personal Credit To Settle Business Debt
This happens when business owners turn to alternative means of settling debts. They may choose to use personal credit cards. Consequently, some financial institutions would want to see their credit score. If they have amassed critical debt, then their loans may be declined. Additionally, this goes to show that impressive personal credit has its benefits to business owners. While business loans can affect personal credit by the debts accrued.
Business Loans—Zero Effect On Personal Credit
There are situations where business loans do not affect personal credit. See instances below.
When No Personal Guarantee Needed
On the other hand, some business loans may never interfere with personal credit. To access business loans, one is asked to provide certain details. For loans requiring an Employer Identification Number, a personal guarantee isn’t needed. This is not the case when a Social Security Number needs to be submitted. This would require a personal guarantee. In essence, it ultimately needs a personal credit score.
Using Invoice As Collateral
Another scenario where a personal guarantee isn’t a big deal is invoice factoring. All the financing firm needs is unpaid invoices. This would serve as a collateral for business loans.
Being a Big Firm
For establishments such as limited liability companies, or S Corporations they need not worry. These firms protect the owners from losing assets when they hit rock bottom. This is where business loans have zero impact on personal credit scores. But for a one-man business, there is no such shield. So chances are that business loans are influenced by personal credit.
Can Business Loans Cater To Personal Matters?
Personal loans are supposed to attend to personal debts. But it can also help in small business funding. On the other hand, business loans should not be used for personal debts. While it can happen, such a move attracts different penalties.
In an instance where an individual is caught, one of the severe punishments is termed “piercing a veil.” This means that a business owner has failed to separate business and personal loans. Such persons are at risk of losing personal assets.
Final Note
Be direct with the type of loan required. While business loans can handle personal demands, be sure of the business financing. In a case where it can affect personal credit, resist the urge to take it.
#Clique, what are your thoughts?
