Business Loans: The Impact of Personal and Business Credit Scores

Setting out on a new business venture requires time, effort and, of course, money. Business loans offer the funds to fuel your business but are often dependent on your personal and professional qualifications. The main contributor to whether or not you receive a business loan is your credit score – both personal and business. Research suggests that 45% of small business borrowers were rejected due to their credit scores.¹

Review the importance of your personal and business credit scores, how each is determined and steps to boost your scores to prepare for the lending process and get down to business.

Personal Credit Score

Lenders utilize your credit score to measure your responsibility, reliability and creditworthiness. They want to know that you have a solid reputation for repaying any personal debts and are capable of doing the same with business financing. Generally, the higher your score, the lower your interest rates and longer your repayment terms. Ranging from a scale of 300 to 850, your personal credit score is made up of:

Your repayment history – 35%
Current amount of debt – 30%
Your length of credit – 15%
Types of credit currently in use – 10%
Any recent credit inquiries – 10%

Your credit score holds more weight with different lenders and different loan types. For instance:

Small Business Administration (SBA) Loans often require credit scores of at least 680, as they offer competitive interest rates and desirable repayment terms.²
Term Loans are more traditional business loans that provide a lump sum accompanied by a set repayment period and fixed interest rate to borrowers with an average score of 680.²
Short-Term Loans place more importance on your business’ cash flow than your personal credit score. Those with credit scores below 680 may be able to get a Short-Term Loan, but it often involves higher interest rates and shorter repayment periods.
Accounts Receivable Financing or Invoice Financing uses unpaid invoices as collateral to repay the loan. Lenders issuing this type of loan are typically more lenient with other components of the business and appeal to applicants with lower credit scores.

How to Build Your Personal Credit Score

If you are a new business owner without existing business credit, lenders rely solely on your personal credit score to determine your creditworthiness. It is crucial to optimize your credit score before applying for a business loan to boost your chances of receiving financing with low-interest rates and fees and a longer repayment period.

Review your credit report to determine the factors that are lowering your score. Access AnnualCreditReport.com to get a free annual copy of your credit reports. If there are any discrepancies or errors within your report, identify and report them to Experian, Equifax or TransUnion immediately. If your credit score is suffering due to identity theft or other unprecedented events, consider submitting a letter with your loan application to explain your situation. Lending is about building relationships, so it may prove beneficial to be forthcoming.

If you do not already have credit, you can open a credit card account and apply for a credit builder loan from your financial institution. Once you have established credit, make sure to make every payment on time, work on paying down debt and avoid closing old accounts to prove your credit history.

Business Credit Score

Lenders typically check the credit score of established businesses in addition to your personal credit score. A business credit score acts as your company’s resume to potential partners and clients. Unlike a personal credit report, anyone can view your business credit report with just a few clicks.

Your business credit score is calculated differently based on criteria from each of the three major business credit bureaus: Equifax, Experian and Dun & Bradstreet. Each bureau will typically collect and analyze financial information such as payment history from vendors or business credit card issuers to determine your risk level. They may also factor in company size, existing credit accounts and credit limits and nonfinancial transactions such as vendor invoices and delinquencies.

How to Build Your Business Credit Score

As each credit bureau has a different formula for calculating your business credit score, it is crucial to keep all of the bureaus up-to-date. You likely will not know which bureau your potential vendors or customers will check, so it is better to be prepared than caught off guard.

Consider establishing trade credit with your third-party suppliers, which will allow you to pay for the inventory days or weeks after receiving it. If granted, ask your suppliers to report your payments to one of the business credit bureaus. Making consistent on-time payments and adhering to the trade agreement will give your score a boost.

It is also beneficial to borrow from lenders that report to a credit bureau, so your payments are recorded and raise your score. Ask each prospective lender if they do so before taking out a loan. Additionally, try making payments early for the optimum business credit score – Dun & Bradstreet assign perfect scores only to those who pay early. This will also help you avoid bankruptcies and liens on your business.

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¹https://www.nerdwallet.com/article/small-business/how-to-build-business-credit-small-business-loans
²https://www.creditsesame.com/blog/credit/personal-credit-can-affect-business-loan-application/