Key insights:
- Personal creditworthiness often plays a significant role when you apply for a small business loan
- Opening a business credit card and taking out a loan in your business’s name can help you build a distinct business credit profile
- Several financing options exist for business owners with less-established credit histories
Yes, personal credit can affect your business credit and chances of getting a small business loan. Lenders often evaluate both your personal creditworthiness and your business’s financial health when deciding whether to approve your loan application.
If you’re a new business owner, you may not be aware of the differences between your personal and business credit. It can also be confusing to know when to use either credit score when looking into the various types of business loans available.
Let’s take a closer look at the key differences between your personal and business credit, how to build a strong business profile separately and funding options to explore in the meantime.
Personal credit vs. business credit
While your personal credit history reflects your individual borrowing and repayment habits, business credit reflects your company’s financial track record. Depending on your situation, lenders may use both to gauge your financial responsibility.
Here are some key differences between the two credit profiles:
Factors |
Personal Credit |
Business Credit |
Credit Evaluation |
Based on individual borrowing history |
Based on company financial history |
Score Range |
Varies by individual evaluation model |
Varies by commercial evaluation model |
Data Sources |
Individual credit accounts and personal loans |
Business credit accounts, vendor payments and public records |
Verification |
Social Security Number (SSN) or Tax ID Number |
Employer Identification Number (EIN) |
Why personal credit affects business credit
For newer or smaller businesses without an established credit history, lenders rely more heavily on the owner’s personal creditworthiness to assess risk. Because the business lacks a track record of its own, your personal financial habits serve as the primary indicator of how you might manage a business loan.
Also, depending on the type of loan, you may be required to sign a personal guarantee to receive funding. Doing so means you agree to be personally responsible for the debt if the business cannot pay.
How poor credit impacts business loan options
A less-than-perfect credit history could limit your financing options, as lenders may view your application as a higher risk. If you do qualify, you might be approved for a smaller loan amount. Lenders may also require you to provide collateral to mitigate their risk.
How to separate personal and business credit
Fortunately, it’s possible to build a distinct business credit profile that helps separate your company’s finances from your personal credit. Taking the following steps could set your business up for financial independence.
Establish the business entity
Forming a legal business structure helps draw a clear line between you and your company. This separation is often the first step in building a standalone business profile. You can choose to establish your business under different entities, including but not limited to:
- Limited Liability Company (LLC): An LLC separates your personal assets from your business liabilities
- S Corporation (S-Corp): This structure offers potential tax benefits while maintaining a separation of personal and business finances
- Corporation (C-Corp): A traditional corporation that acts as a separate legal entity from its owners
Open a business bank account
Once you’ve established a business entity, keeping your company funds in a dedicated business bank account can help simplify your bookkeeping and tax preparation. It also helps establish a relationship with that bank if you decide to apply for one of their business loans.
Get a business credit card
Using a business credit card for company expenses also helps build your business’s financial track record. Paying the balance on time each month can demonstrate financial responsibility to future lenders.
Apply for business loans
Taking out a loan in your company’s name and making consistent, on-time payments is a solid way to build a commercial credit history. Understanding how to apply for a small business loan could help you prepare the necessary documents and find the right fit for your needs.
Types of business loans for less established credit
In the meantime, it is possible to still get a business loan with no or limited credit. However, there are usually trade-offs, such as higher interest rates or stricter collateral requirements. If you’re looking for a business loan that fits your current credit profile, you might want to consider the following funding options.
SBA loans
Small Business Administration (SBA) loans are government-guaranteed loans that small businesses can use to obtain funds for handling expenses. This backing reduces lenders’ risk, making SBA loans more accessible to business owners who might not qualify for conventional funding.
