How Your Personal Credit Affects Your Business

by Megan Sullivan

3 min read

In today’s marketplace, many people have witnessed their personal credit scores take a hit due to misfortune or unpaid loans. While many people manage their bills efficiently, it’s important to note that, as an entrepreneur, your personal credit can and often will affect your ability to secure a business loan or other types of financing.

Why Does My Personal Credit Score Matter?

You may think that because your personal credit score is, well, personal, it shouldn’t have any bearing on your business life. Unfortunately, that just isn’t the case. Many lenders—especially financial institutions—review their applicants’ personal credit scores as part of their decision on whether or not to grant a loan.

To the majority of lenders, your credit score reflects how well you handle money. A low credit score may indicate that you don’t handle your finances well, and therefore, won’t be able to handle your business’ finances well either.

What Can I Do to Improve My Score?

It’s quite possible that your low credit score is due to a legitimate circumstance beyond your control, for example, identity theft. If that is the case, make sure that you submit a letter with your loan application that explains any of your personal credit shortcomings and illustrates the steps you’ve taken to prevent it from happening again.

This is especially true if you have ever declared bankruptcy or have an established pattern of making late payments or no payments. For most people, getting these negative dings off of a credit report takes anywhere from seven to 10 years, so chances are you will need to offer some explanation when applying.

Is This True for Every Lender?

The good news is no, not all lenders scrutinize personal credit scores, or even use that information the same way. Below are a few of the more common types of lenders and their stance on personal credit.

  • Small Business Administration (SBA): For this one, your personal credit record has to be pretty much spotless. The loan application process is intensive and in 2013, only 13% of all SBA loan applicants were approved. In most cases, you’ll need a FICO score of at least 700 to be considered.
  • Revenue-Based Loans: If your business has a steady cash flow, and you make regular deposits to a bank, then you can leverage this consistency to qualify for a revenue-based loan. Business revenue lenders generally review a business’ deposits for the past six months and evaluate the consistency of those deposits, as well as the total monthly deposit amount. Even with a personal credit score of 500, you can still qualify for revenue-based loans, but you must have a steady cash flow.
  • Independent Investors: Whether you’re seeking the backing of a venture capitalist or angel investor, your personal credit may not come into play quite as much. A solid business strategy and marketing plan—as well as a really sellable product—are often more important to venture capitalists than other factors.

Additionally, venture capitalists and angel investors normally want equity or shares in your business in return for their capital. Oftentimes this exchange brings you their knowledge and expertise. Investors may not feel your personal credit is such a risk if they have a hands-on role in the business to help make sure it is successful.

There are additional loan types for business owners with bad credit, including account receivable financing, merchant cash advances, and asset-based loans. Determining the right one for you will depend on many factors, including how much money you are looking to borrow, the loan’s repayment terms and your business’ revenue model.

At the end of the day, you should first try to secure a loan through a formal lending institution, such as a bank, because they are normally your best option. However, don’t be discouraged if they turn you down. There are enough alternative lending options available to small business owners and entrepreneurs that you should be able to secure the financing you need to make your business a reality.

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