When applying for a business loan, many entrepreneurs assume that only their business credit score matters. However, your personal credit score can also play a significant role in the loan approval process. Lenders may use your personal credit as an indicator of how responsible you are with debt and your ability to repay loans, especially if your business is a startup or doesn’t yet have a solid credit history.
In this guide, we’ll explain how personal credit impacts business loan applications, why it matters, and what you can do to ensure your credit history works in your favor when seeking financing.
Lenders use personal credit scores to assess the financial responsibility of business owners, particularly when the business is still in its early stages or lacks a robust credit history. Personal credit history can provide insight into the borrower’s ability to manage debt, meet repayment obligations, and maintain financial discipline—qualities that are crucial for successful loan repayment.
Risk Assessment: Personal credit scores give lenders an additional tool to evaluate risk. Lenders may see a low personal credit score as an indication of financial instability, increasing the perceived risk of lending.
Personal Guarantee: For small businesses or startups, lenders may require a personal guarantee. This means that if the business fails to repay the loan, the owner’s personal assets could be used to cover the debt.
Limited Business Credit: New businesses or businesses without an established credit history may rely on the business owner’s personal credit as a proxy for the business’s financial health.
Your personal credit score can be a deciding factor in whether you are approved for a loan and the terms of that loan, particularly for newer businesses or small businesses without an extensive credit history.
While your business credit score reflects your company’s creditworthiness, your personal credit score is often used by lenders to make lending decisions in the absence of a strong business credit history.
For loans backed by the Small Business Administration (SBA), such as the popular 7(a) loan program, your personal credit score is one of the key factors in determining loan eligibility. The SBA typically requires a minimum personal credit score of around 620 for their loans, though the exact requirements can vary depending on the lender.
Why It Matters: For SBA loans, a strong personal credit score can increase your chances of approval, especially if your business doesn’t yet have an established financial track record.
Unsecured loans, where no collateral is required, are riskier for lenders. As a result, lenders are more likely to use your personal credit score to evaluate your ability to repay the loan. For unsecured loans, a higher personal credit score can help you qualify for larger loan amounts and better terms.
Why It Matters: If your personal credit score is high, it shows lenders that you are trustworthy and capable of handling debt, which can help you secure unsecured financing for your business.
When applying for a business line of credit, lenders will often look at your personal credit to assess your ability to repay and determine your credit limit. For businesses with limited operating history, personal credit may be one of the most important factors in approval.
Why It Matters: A strong personal credit score could lead to a higher line of credit, providing your business with more flexibility for short-term working capital needs.
In addition to influencing loan approval, your personal credit score can also impact the terms of your loan—such as the interest rate, repayment period, and loan amount. Here’s how:
The better your personal credit score, the lower your interest rate is likely to be. Lenders view borrowers with high credit scores as lower risk, which results in more favorable loan terms. On the other hand, borrowers with low credit scores may face higher interest rates due to the increased risk involved.
Why It Matters: Lower interest rates mean lower overall borrowing costs, which can save your business money in the long term.
Lenders may offer more flexible repayment terms (longer loan periods or lower monthly payments) to borrowers with higher personal credit scores. This makes it easier to manage your cash flow and ensures that the loan is more manageable.
Why It Matters: More favorable repayment terms make it easier to meet your obligations and keep your business running smoothly.
If your personal credit score is strong, you’re more likely to qualify for larger loan amounts, which can be critical for businesses that are looking to expand, invest in equipment, or cover significant operational costs. A low personal credit score may limit the size of the loan you’re eligible for or result in a rejection.
Why It Matters: Access to larger loan amounts gives your business more flexibility to finance growth and achieve its long-term goals.
Improving your personal credit score is an important step in preparing for a business loan application. Here are some practical tips to help you boost your credit score:
Payment history is one of the most significant factors in your personal credit score. Ensure that you pay all your bills, including credit card bills, loans, and other debts, on time.
Why It Matters: Timely payments show lenders that you are financially responsible and capable of managing debt.
A lower debt-to-income ratio (the amount of debt you have relative to your income) improves your creditworthiness. Try to pay down existing debt to free up more financial resources.
Why It Matters: A lower ratio can improve your personal credit score and increase your chances of loan approval.
Regularly check your personal credit report for inaccuracies or fraudulent activity. Errors, such as incorrect payment history or personal information, can lower your credit score.
Why It Matters: Disputing and correcting errors ensures that your credit report accurately reflects your financial history, improving your score.
Try to keep your credit utilization ratio (the amount of credit you’re using relative to your available credit limit) below 30%. High credit utilization can lower your credit score.
Why It Matters: Low credit utilization shows lenders that you’re not overly reliant on credit and can manage your finances responsibly.
While business credit scores are critical for securing financing, your personal credit score plays an equally important role in the loan approval process. Lenders use your personal credit as an indicator of your financial responsibility, especially if your business is new or lacks a solid credit history. By understanding how personal credit impacts your business loan application and taking steps to improve your credit score, you can increase your chances of loan approval and secure better financing terms.
Take the time to improve your personal credit score, gather necessary documentation, and explore loan options. By boosting your credit and understanding how it impacts your financing options, you’ll be in a better position to secure the capital your business needs to grow.