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Camino Financial
By: camino-financial
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Does a Business Loan Affect Personal Credit? 

Does a business loan affect personal credit score? Nearly every business owner asks this question when considering whether to get a loan.

This post answers that specific question and other inquiries most often relating to business loans, personal and business credit, and the best ways to improve your credit score.

Tables of Content
1. What is a business loan, and how does it work?
2. Differences between business and personal credit scores
3. How does a business loan affect your personal credit? 
4. Types of business loans that can affect personal credit scores
5. What happens if you don’t pay back a business loan?
6. Benefits of getting a business loan to improve your personal credit score
7. So, does a small business loan affect personal credit?
7. FAQs

What Is a Business Loan, and How Does It Work?

Business loans provide temporary financial assistance to start or expand a business. Borrowers agree to a lender’s terms and conditions before they receive funding.

In exchange for receiving capital, the borrower makes installment payments within a specified period.

The total loan repaid includes the principal amount borrowed plus interest and closing costs.

Business owners use the funds for business-related expenses. Examples include:

  • paying employees
  • improving working capital
  • purchasing equipment and inventory
  • making building renovations
  • expanding products lines and services
  • and more!

Business loans are especially helpful to alleviate cash flow problems, use cash to make one-time investment opportunities, or pay off credit card balances.

Ask For a Business Loan Without Affecting You Credit Score

Differences Between Business and Personal Credit Scores

Business and personal credit scores have key differences.

Business credit score

Business credit scores indicate how well your business manages debt and its credit riskiness. It goes from 1 to 100.

A business owner incorporates their business and then applies and receives an EIN to establish this score.

They register this number with the three credit bureaus and may decide to apply for a separate Dun and Bradstreet number.

As the business pays vendors and supplies, they establish a credit history with these agencies.

The three credit bureaus and Dun and Bradstreet evaluate the business’s payment history, utilization ratio, and other credit factors to establish a business credit score.

Personal credit score

Your personal credit history reflects how you personally handle money over time. Individuals with higher credit scores are less of a financial risk to lenders.

It goes from 300 to 850.

The three credit bureaus use your SSN to establish your personal credit score, reflecting your creditworthiness to creditors and lenders.

The credit agencies review your payment history, how much you owe, and the length of your credit history. They also review the types of outstanding credit you have (credit cards, loans) and the number of new credit accounts you’ve recently opened.

Learn how to boost your credit score.

computer with a screen of a credit score checker

How Does a Business Loan Affect Your Personal Credit?

Lenders affect your personal credit when they require both personal and business credit scores to approve a loan and report loan payments to both types of histories.

Likewise, setting up your business structure determines whether the owners are personally liable for business debt.

LLCs, S and C Corporations keep their personal and business expenses separate.

Therefore, these business structures offer the best protection to shield the officer(s) and partners’ personal credit histories.

Lenders that require a business owner to submit a personal guarantee regardless of the business structure mean that person is personally responsible for the debt.

In some situations, an owner may declare personal bankruptcy when a business defaults on a loan, adversely affecting their personal credit.

How to avoid this?

A business owner can use their business assets as collateral to secure a loan so they don’t jeopardize their personal credit.

Business credit cards approved solely on an owner’s EIN (not an SSN), business name, and business credit score don’t affect their personal credit.

Are business loans reported to credit bureaus?

It depends on the lender.

Before you sign a loan agreement, that’s an important question if you intend to take out future business loans for more significant amounts at better terms.

#DidYouKnow
You build a stronger business profile when they report timely payments and payoffs to the 3 credit bureaus.

Ask For a Business Loan Without Affecting You Credit Score

Types of Business Loans That Can Affect Personal Credit Scores

Any loan that a lender approves based on your legal name, address, social security number, and personal income can positively or negatively affect your credit score, depending on your repayment history.

Examples of loans business owners use to finance their businesses include personal, term, debt consolidation, payday, and equipment loans, as well as credit cards.

These are typically secured loans where lenders require a personal guarantee or collateral in the form of personal assets.

Is business credit different from personal credit?

There are a few key differences between business and personal credit. Primarily, business credit is based on the creditworthiness of the company rather than the individual owner(s).

This means that businesses can obtain loans and lines of credit even if the owners have poor personal credit scores.

Additionally, business credit scores are typically based on different factors than personal credit scores.

For example, payments made on time and debt-to-income ratio are more important for evaluating a business’s creditworthiness than they are for an individual.

This is because businesses tend to have more variable incomes and may have larger debts relative to their assets.

How to build business credit with bad personal credit?

Building business credit can be a challenge if you have bad personal credit. However, it is not impossible. There are a few things you can do to help improve your chances:

1. Get a business credit card – Even if you have bad personal credit, you may be able to get a business credit card from some issuers. This can help create a positive payment history for your business, which will be helpful in building business credit.

2. Use vendor lines of credit – Many vendors will offer lines of credit to businesses, even if they have bad personal credit. Using these lines of credit and paying them off on time can help build positive trust with creditors and improve your business’s standing.

What Happens if You Don’t Pay Back a Business Loan?

Once the lender reports a business loan default to credit agencies, an immediate result is that your business credit score and possibly personal will plunge.

Usually, a lender isn’t concerned about one missed payment, but 3 or more alert them of a problem.

#DidYouKnow
Lenders will notify late payments in your business credit report.

Negative activity on your credit history prevents you from getting approved for future loans making it harder to obtain working capital when needed.

In the worst cases, some lenders will try to collect what’s owed by hiring a collection agency or bringing a lawsuit against your business.

If you offer collateral as part of the loan agreement, the lender can legally take possession of your personal property (a house, car, personal bank account).

When you can’t repay a loan, your best approach is to work closely with your lender. Be honest with them about your financial situation. Then, you may be able to resolve the issue without ruining your credit and business’s reputation.

Benefits of Getting a Business Loan to Improve Your Personal Credit Score

A sole proprietorship can use a business loan to improve the owner’s personal credit score even though they use their SSN to report taxable earnings.

Because sole proprietors use personal credit rather than business credit when applying for a business loan, they can improve their personal credit score when they establish and maintain a good credit history.

They do this by making payments on time and paying off loans and credit cards.

As their personal credit score improves, they are better positioned to open vendor accounts, apply for a business card, and qualify for future financing for higher loan amounts at better rates.

Ways to improve your personal credit score:

  • Concentrate on paying off the oldest past-due accounts. Creditors will continue to add late payment fees, which you eliminate, thereby reducing your overall debt by paying them off.
  • If you have several accounts to pay off, start with the smallest one first. Once that’s paid, move to the next account until you’ve paid off all your accounts.
  • Work with collection agencies to settle outstanding accounts you legitimately owe. Ask them to remove the negative entry on your credit report once you pay the balance.
  • While you do this, don’t apply for new credit. If needed, you can open new accounts later but pay them in full each month. If you can’t do that, don’t open the account.
  • Your goal is to pay off each account in full each month or billing cycle. If that’s not possible, pay more than the minimum amount and don’t take on new debt until you can pay off your accounts.
  • When you can pay off debt each month, ask creditors to increase your credit limits which lowers your total credit utilization and should increase your credit score.
  • Programs such as Experian Boost report rent and utility payments to your Experian credit report once you link your bank accounts to the free service.

#DidYouKnow
Individuals that handle money responsibly receive the highest scores from credit bureaus.

So, Does a Small Business Loan Affect Personal Credit?

Your personal credit is affected when lenders require both personal and business credit scores to approve a loan and report loan payments to both types of histories.

Likewise, setting up your business structure determines whether the owners are personally liable for business debt.

Moreover, sole proprietors use personal SSNs, and owners of partnerships provide personal credit information when taking out loans. Therefore, if they don’t repay debt, it directly affects personal credit.

#CaminoTip
Working with a lender that doesn’t require your personal credit report or business assets as collateral for financing is to your advantage.

Camino Financial has more lenient requirements than traditional banks and other online alternative financers.

Apply for a small business loan today and explore your funding options. You will be pleasantly surprised with our reasonable minimum requirements, fast funding, and knowledgeable customer service representatives.

Our motto, “No Business Left Behind,” motivates us to help business owners succeed.

    Ask For a Business Loan Without Affecting You Credit Score

    FAQs on Business Credit Vs. Personal Credit Score

    How to get business credit with bad personal credit?

    Follow these tips:

    • Set up credit lines with vendors and suppliers on a 30 or 60-day basis, make timely payments to every creditor, and ask them to report your payments to the 3 major credit bureaus.
    • Only spend 30% of your total available credit, which helps build your business credit score.
    • Review your business credit history often to check for inaccurate reporting.
    • Find lenders willing to offer loans to borrowers with bad credit. Then, make timely payments to build credit.

    What is PG in business credit?

    PG stands for a personal guarantee.

    It means that you agree as an officer of a corporation or partnership to be personally responsible for any debt your business owes if it can’t fulfill a financial obligation to a creditor.

    Do you need good credit for a business loan?

    Some lenders don’t require a good credit score, but they do need to verify that your business has sufficient income and has been in business for a specified length of time to be able to repay a loan.

    These lenders charge higher rates for smaller loan amounts for borrowers with bad credit and may require collateral or a co-signer to secure the loan.

    Does taking a business loan affect your credit score?

    It can affect it both negatively and positively.

    If you make payments on time and pay them off, your credit score should increase. Conversely, it goes down when you have no way to repay it.

    Does a business account affect personal credit?

    Yes, it can, depending on how you legally set up your business, whether a person offers personal assets as collateral, and using an SSN to apply for a business credit card or loan.

    Consult with an accounting or legal professional before borrowing money if you have questions.

    Does a business have a credit score?

    Yes, they do.

    A business credit card help to build business credit?

    Business credit cards can help to build business credit. You’ll need to use your business credit card responsibly and make on-time payments to build good business credit.

    You should also try to keep your utilization rate (the amount of your credit limit that you use) low and make sure that your account is in good standing.

    If you manage your business credit card responsibly, it can be a great way to build up a good credit history for your business.

    This can be helpful if you ever need to borrow money or take out a loan in the future.

    What are the business credit bureaus?

    Dun & Bradstreet, Experian, and Equifax.

    What are some business credit cards that do not report to personal credit bureaus?

    Some of the following credit card issuers don’t report to personal credit bureaus (but do to business credit bureaus):

    • Bank of America
    • Citi
    • PNC
    • Wells Fargo

    Do businesses have credit scores?

    Yes, businesses have credit scores. Lenders use these scores to determine whether or not to extend credit to a business. Businesses with higher credit scores are more likely to get approved for loans and lines of credit.

    A business credit card help to build business credit?

    Business credit cards can help to build business credit. In order to build good business credit, you’ll need to use your business credit card responsibly and make on-time payments.

    You should also try to keep your utilization rate (the amount of your credit limit that you use) low and make sure that your account is in good standing.

    If you manage your business credit card responsibly, it can be a great way to build up a good credit history for your business. This can be helpful if you ever need to borrow money or take out a loan in the future.

    Will a business credit card help my credit score?

    A business credit card can help your credit score in a few ways.

    • First, if you use the card responsibly and make payments on time, you’ll build a positive payment history, which is one of the key factors in determining your credit score.
    • Secondly, having a business credit card can help improve your credit utilization ratio (the amount of debt you’re carrying versus your total available credit), which is another important factor in determining your score.

    Of course, there are other factors that affect your credit score as well, but using a business credi{t card can definitely be helpful. If you’re looking to build or rebuild your credit, getting a business credit card and using it wisely is worth considering.

    Do business credit cards affect personal credit?

    No, business credit cards do not affect your personal credit. This is because business credit cards are reported on a separate credit report from your personal credit report.

    So, even if you have poor financial management with your business credit card and rack up a lot of debt, your personal credit score will not be affected, but this could change if the lender asks you for your personal credit when asking for a loan and it’s approved with it.

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