Does a Business Loan Affect Your Personal Credit?

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When applying for a business loan, it's important to understand how (and if) the loan will affect your personal credit. Taking on a significant amount of business debt that affects your personal credit can reduce your ability to purchase items for your personal use in the future, such as a new home or car. 

Thus, before taking on a business loan, make sure you understand the impact that it can have on your individual borrowing capacity. So does a business loan affect personal credit? The answer varies.

The Difference Between Business and Personal Credit

Business credit is driven by your company's financial performance and history, whereas personal credit is determined by your payment history on prior loans and lines of credit. If you own a small business, your personal credit will likely determine the amount of money that you are able to borrow for your business. 

This limitation is especially true for sole proprietorships and partnerships, where lending institutions utilize your personal credit history to determine the amount of money you can borrow. 

For companies that are formed separately from the owner, such as limited liability companies, lenders will offer loans based on the company’s performance but may also ask for the owner’s credit history when making their lending decision. 

Your personal credit is linked to your Social Security number, which is what you would use to apply for a loan if you are a sole proprietor or partner in a partnership. However, if your business has an EIN number (federal employer identification number), then you may use it to apply for business loans. 

An EIN number is only given to companies with certain business structures, such as limited liability companies and corporations. Once a business borrows money using an EIN number, it begins to create a credit history based on that number.

When Business Finances Can Affect Personal Credit

Does a business loan affect personal credit? Business finances affect personal credit when loans are taken out using the owner’s Social Security number. 

If the owner personally guarantees the loan, it will be reported on the owner’s credit report. Having a personally guaranteed loan means that the owner is responsible for repaying the amount borrowed, even if the business defaults or goes under. 

Suppose that you own a sole proprietorship or partnership and choose to take out a loan for the business under your own name. In that case, lenders may require collateral or a personal guarantee on the loan, especially if the business is new, you are borrowing a significant amount of money, or if you do not have a strong credit history. 

Such collateral can typically be items such as your home, expensive equipment, or other assets. 

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Does a Business Line of Credit Affect Personal Credit?

Business credit cards can also be used to gain a line of credit. Depending on your business structure, you may or may not be personally guaranteeing the repayment of the loan. 

If you use a business EIN number to apply for the credit card, then the repayment of the line of credit will be reflected on your company's credit report. If the business credit card is taken out under your Social Security number, it will be reflected on your personal credit report. 

So does a business line of credit affect personal credit? It varies according to the terms that the borrower agrees to.

Keeping Business Finances Separate from Personal Finances

If you prefer to keep your business finances separate from personal finances, it is important to choose an appropriate entity structure. Entity structures that allow you to establish business credit history separate from your own personal credit history include:

  • Limited liability companies
  • S-Corporations
  • C-Corporations

While these entity structures will limit your personal liability for the business, they may make it more difficult to qualify for debt financing, especially if the company is new and hasn’t significantly established itself. 

To keep your personal finances separate from the company's, make sure to use a separate bank account for the business

If you choose to take out a business credit card, make sure you understand the terms and ensure that you are not personally guaranteeing it. The business credit card should be applied for using your company’s EIN number.

How Does a Business Loan Affect Personal Credit?

A business loan affects your personal credit when you guarantee it personally. In this case, it is important that your business makes repayments towards the balance of the loan on time and on a regular schedule. 

A business loan that is personally guaranteed by you and is not repaid on a regular or timely basis can have a devastating effect on your personal credit history. 

When agreeing to a personally-guaranteed business loan, it is important that you understand the terms and have the ability to repay the loan, regardless of how the business performs. 

Defaulting on a personally guaranteed business loan can drop your credit score significantly, resulting in the inability to obtain future funding. If you pledge personal collateral on a business loan and subsequently default, you will lose the collateral that you pledged. 

So how does a business loan affect personal credit? It will affect your personal credit if you personally guarantee the loan.

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How to Keep Business Debt off Your Personal Credit Report

If you prefer to keep business debt off your personal credit report, it is important to choose an entity structure that limits your personal liability and to apply for financing utilizing your company’s EIN number rather than your own Social Security number.

By setting up a limited liability company, S-corporation or C-Corporation, you can use your company’s EIN number to apply for credit. 

Shareholders of these companies, who are the owners, are not personally responsible for the financial activities of the company. However, a lender may still request personal financial information before granting a loan in some cases. 

Regardless of the type of entity structure that your business has, it is still important to ask a lender questions before agreeing to take out a loan or business credit card. 

If you prefer to keep your business finances separate from your personal finances, make sure that you understand the terms of the loan or line of credit. Ensure that you are not personally guaranteeing the financing in any shape or form.

How a Business Loan Can Affect Your Business Credit

A business with an EIN number will begin to establish a credit history once it engages in debt financing and establishes a performance history. Young businesses (less than three years old) will take some time to develop a regular credit history. 

However, as they grow and become more predictable in terms of earnings and payment history with vendors and lenders, it will become easier to obtain outside funding. A business credit score will improve over time as the company remains successful and manages its finances appropriately.

Can Personal Debts Affect Business Loans?

Personal debts can affect the ability to obtain business loans, especially if the company is newly established or if the borrower has a poor personal credit history. It may be impossible for individuals with a history of missed payments, large loans, or other negative items on their credit report to obtain a business loan. 

Banks will certainly consider your personal credit history if you are a sole proprietor or partnership. They may also consider it if your company has not yet established business credit or a solid earnings history.

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