Does Business Loan Affect My Credit Score
Transforming an idea into a full-fledged business which is up and running is intimidating, especially if you are a young entrepreneur with no prior experience. It is when you start, you realize that there are several aspects to running a business. Credit score is one such aspect which assumes significance when you are trying to borrow capital for business. Most lenders decide on a loan application based on this score. Before we delve into this aspect, let us first understand the concept of credit score.
A personal credit score is a summary of an individual’s payments of loan taken from banks and other financial institutions. The credit score is generated by credit rating agencies and typically ranges between 300 and 900. You should have a minimum score of 750 to be considered for a business loan.
It remains one of the important eligibility criteria and most banks, NBFCs, and financial institutions consider the credit score during the review of the borrower’s business loan application form.
A bad credit score can ruin your chances of loan approval and you might have to turn to alternate sources for raising money. Even after a lot of running around you may get that loan, but a bad credit score puts you on the category of risky applicants and increases the rate of interest. In fact a good credit score for loans give you a bargaining power in terms of interest rate.
Just like your personal credit score, there is a company credit report (CCR) which is a record of a company’s credit history. CCR is created based on the data submitted by banks and financial institutions across the country. Remember, CCR is not a credit rating but a report which is evaluated by banks and institutions before processing loan applications.
You may have struggled to get a business loan based on your personal credit score, but a bad business loan credit score can have a bearing on your personal credit score as well. Your professional and personal identities are believed to be separate. However, the founder of a small business owner is often recognized as the face of the business and their personal credit scores are closely scrutinised.
Most banks and lenders are inquisitive about your personal credit profile whether your business is small or big. In absence of any relationship with the bank it becomes all the more important for lenders to check on your personal credit score. It is because if the personal credit score is good it will offer some assurance to the lender besides reflecting upon your financial responsibility as a borrower.
Sometimes, lenders specifically want to know the track record of the business owner, thereby putting the company and founder on equal footing. It is therefore crucial to understand which forms of business can impact your personal score.
In case of a sole proprietorship business, your personal credit score is your business credit score. Such a business doesn’t have much difference between the business and the owner. According to the law, sole proprietors are liable for the debt of their business, hence if you default on your business loan it will directly impact your personal credit score.
In case of a partnership business, it is almost the same as a sole proprietorship and your personal credit score is considered important. For businesses like a LLP, partners are liable for only a certain extent of debt. A lending company always enquire about credit details of all the partners involved in the business.
Finally, a Ltd. company has its own corporate identity and the shareholders will not have any liability of the company. However, lenders can still ask for personal credit details of the directors and the business owner.
The comparisons above state whether small or big business, there is no breather because your personal credit profile is linked to that of your business. It is hence critical for a small business owner to maintain a good personal credit score and businesses credit score.
How to ensure a good credit score
Don’t default on payment: Your personal credit score depends on whether you are paying interest and EMIs on time or before the due dates. Make sure that your credit score for loans don’t get affected and you don’t have payments pending.
- Don’t take loan which you can’t affordable: You should always take a loan which you can repay from your business to maintain a good credit score. It means that debt should not exceed the amount of your income. It could act as a red flag in the credit report.
- Avoid taking too many loans: The intent of taking a loan should be genuine and you should be mindful of the loans you had applied because too many loans doesn’t augur well for your credit score. It is because too many loan applications or rejected loan applications can work against your credit score. Only apply for loans you plan to utilise fully, have the repayment structure ready.
- Business customers: Another factor which can be considered by lenders is the credit period given to customers. As a business owner if the repayment from customers is for a longer period of time, it could lead to a lower credit score.