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.

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 the guesswork out of shopping for a business loan and get connected to a potential lender fast with our easy online form.

Now that’s genius.

Caitlyn Rose Finance Journalist

Caitlyn is a business consultant and writer with an intimate understanding of business finance.

An entrepreneur at heart, she supports small local businesses whenever she can.

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Late Payments Hurt Your Credit Score

Please be aware that missing a payment or making a late payment can negatively impact your credit score. To protect yourself and your credit history, make sure you only accept loan terms that you can afford to repay. If you cannot make a payment on time, you should contact your lenders and lending partners immediately and discuss how to handle late payments.