Why Personal Credit Still Matters for Business Loans

Why Personal Credit Still Matters for Business Loans
Caitlyn Rose
on August 12, 2016
Read in 2 min

Today’s lenders are turning to personal credit, in addition to business credit, as an indicator of risk for business loans.

Modern business owners considered to be creditworthy are chasing business loans from traditional banks, and credit is ruling the road to financial assistance.

The Bad Credit Problem

Unfortunately, bad credit has plagued a sizeable slice of small and medium-sized businesses due to the financial difficulties faced in recent years.

The fact is, it’s really hard to finance a business without bank loans.

Because of widespread bad credit, businesses are turning to regular bank deposits, cash flow and business cash advance to stay afloat.

Deposits, entering a business’s bank account monthly, are used to fuel a business’s growth.

Why lenders look at personal credit

Why Lenders Look at Personal Credit

Today, business owners are taking a personal hit too.

They’re personal credit scores are now being scrutinized to prove the viability of their business. But why?

Because lenders need to determine whether or not a business operator can manage their payments.

Checking out employment history, past income, and outstanding debt certainly do paint a picture, but personal credit depicts an individual’s financial stability, income amount, and any debt threats.

Personal lenders need to know a business operator’s personal debt-to-income-ratio to assess the risk of lending.

Really, examining personal credit offers security against possible inability to pay.

Lenders don’t want to invest in someone who might crash, financially, and be unable to return lent finances.

It’s important to note, however, that personal credit weighs a lot more on younger businesses and start ups.

If a business has little to no financial history, personal credit is necessary to establish “proof” of financial stability.

Matured businesses, meanwhile, can often get around with their business credit score alone.

If a business has been open for many years, lenders may be more likely to prioritize other factors over personal credit.

Examining Collateral, Capital, & Conditions

When a business owner applies for a loan, personal credit is viewed to determine the individual’s collateral.

Collateral is an individually owned portion of value to be subtracted from a borrowed sum’s overall amount.

If a business owner can’t return lent funds, they can compensate with their own money.

That said, examining the individual’s credit cards, outstanding loans, and lines of credit is important.

Many lenders refuse to let business owners borrow funds without collateral— and rightfully so!

By examining a personal line of credit, lenders can also pair a business loan with the individual’s owned capital.

While a person’s household income is expected to be their primary resource of repayment, their capital can compensate, too.

A business owner’s investments, savings or other assets can be used to repay a loan, protecting them from setbacks.

For this reason, personal credit is even more valuable for business owners than it used to be.

Personal Credit for Business Loans: The Bottom Line

Lenders want to know how business owners intend to use their business loans.

Personal credit, when examined, is a good indicator of personal purpose, and a lot of lenders view it as a cornerstone of loan decision-making.

When pre-approved loans are considered, many difficulties surrounding loan procurement are stripped away.

Even with this information, lenders all have different underwriting criteria, which can make getting a business loan a royal pain in the neck.

At least LendGenius.com has risen to the occasion:

Take all the guesswork out of shopping for a business loan and  get connected directly to a lender.

Making lenders compete for your business?

Now that’s genius.

Caitlyn Rose Finance Journalist

Caitlyn is a small business consultant and editor for LendGenius with an intimate understanding of business finance.

She’s an entrepreneur at heart & supports local businesses whenever she can.

Featured

9 Ideas on How to Build Business Credit Fast

by Taylor Gordon on June 6, 2017
If you want to learn how to build business credit to access better financing options, this is the article for… Read more

Minority Business Loans – Discover 36 Opportunities Here

by Taylor Gordon on May 15, 2017
You may be searching for minority business loans because you have an idea for a great new business. Or perhaps… Read more

Small Business Loans for Women – Compare 38 Options in One Place

by Rebecca Hosley on May 15, 2017
When it comes to small business loans for women, knowledge is power. Women are not new to entrepreneurship, but they… Read more

Debt Service Coverage Ratio Explained in Acute Detail

by Amy Fontinelle on May 10, 2017
Sara owns a thriving restaurant, and she thinks the time is right to expand. Specifically, she wants to expand the… Read more

Microloans: What They Are & How To Take Advantage

by Eric Goldschein on May 1, 2017
Microloans refer to a category of financing where you can qualify for short-term working capital (or even start up capital) with low… Read more

How to Calculate ROI – Making Your Small Business Loan Count

by Dustin Clendenen on April 24, 2017
Here's a controversial thought: Not all debt is bad debt. Since not all of us are independently wealthy or particularly… Read more

Small Business Funding – Debt Financing vs Equity Financing

by Rebecca Hosley on April 22, 2017
Everything You Need to Know About Small Business Funding in 2017 Deciding to start your own business is a huge… Read more

Small Business Loans for Veterans – A Definitive Guide to VA Business Loans

by Eric Goldschein on April 7, 2017
Small business loans for veterans are available through various channels and are also often supplemented with business development tools. Business… Read more

EMV Compliance: The Good, The Bad, & The Ugly

by Amy Fontinelle on March 7, 2017
As a savvy business owner that accepts credit and debit cards, you should aleady know the dangers of failing to upgrade… Read more
Join For Free & Start Browsing Loans