3 min read
You probably expect your business credit score to play a major role when you’re trying to get a business loan. What about your personal credit score?
You know the rule of thumb. As a business owner, you should separate your personal and business finances, right? It’s easy to assume that you don’t need to worry about your personal credit score. But many lenders actually do check your personal credit report and score when you apply for a business loan.
Your personal credit score shows how well you manage your past and existing credit obligations. This score (which ranges from 300 to 850 for many credit score models) tells future lenders how likely you are to repay your loan.
Your personal credit scores (yes, there is more than one!) are based on several factors but mostly focus on your payment history, debt utilization, and length of your credit history. Credit scoring models also look at the mix of type of debts you have –like revolving debt (credit cards) or installment debt (loans).
It also includes how frequently you’ve applied for credit. Make sure that you work with lenders – like QuickBooks Capital – that only use soft pulls when you’re shopping for a loan. Otherwise, you may end up with a lot of hard inquiries, which can lower your score.
When you apply for a business loan, many lenders may require you to personally guarantee the loan based on your personal credit. This is especially true for startups and businesses that have not yet established a solid business credit history.
Many lenders include personal credit requirements in their eligibility policies, though the minimum score required will vary. For example, QuickBooks Capital requires applicants to have a minimum personal FICO score of 620 or higher.
Having a low personal credit score isn’t necessarily a deal breaker. But it can make it harder to get approved. Even if you are approved, the interest rate may be higher than it would be for an applicant with excellent personal credit.
The good news? Most lenders also consider other factors, including your business finances, business revenue, and time in business.
If you need working capital but your credit isn’t great, you still have options. Here are a few things to consider.
Consider lenders that offer secured loans. A secured loan allows you to use assets, like real estate or a company vehicle, as collateral for the loan. But if you don’t repay the loan, you risk losing the collateral.
Highlight positive business growth. If your business has a proven record of positive cash flow and/or a strong repayment history, you may be able to leverage your business performance to secure the loan. An easier option is to confirm your accounting records in QuickBooks are accurate and up-to-date. That strong record can help you get funded.
Consider short-term business funding. Not all loans, or loan requirements, are created equally. Short-term business loan requirements often rely less on personal credit and more on existing business revenue. You may be able to work with a bank or online lender that offers this type of funding.
QuickBooks Capital, for example, may give you better access to funding than you might have with other lenders because it considers your business history in QuickBooks, your business bank account transactions, revenue, liabilities, and personal guarantee, to name a few key factors.
Seek out investors. Angel investors and venture capitalists fund based on the business concept, the potential for success, and the owner’s professional background and expertise. These arrangements usually result in an exchange of equity or venture debt, but they can still help secure funds.
Improve your personal credit. This may not be the fastest route to getting business funding, but it’s likely the most beneficial in the long run. The best place to start is by requesting a copy of your credit reports from all three of the major consumer credit reporting agencies—Equifax, Experian, and TransUnion. You can do this for free, once every 12 months at www.annualcreditreport.com.
Verify that the information on your reports is correct and up to date. Dispute errors directly with the credit reporting agency as soon as you notice them. You can also improve your credit by paying your bills on time, paying down debt, and keeping credit card balances low or paying them in full every month.
Even though your business and personal finances shouldn’t mix, your personal credit can help you. Building and maintaining good credit during times when you don’t need it pays off in the times when you do.