How Does a Business Loan Affect Personal Credit?

How Does a Business Loan Affect Personal Credit?

It’s common to wonder if a business loan will impact your personal credit, especially for those seeking to keep their business, personal finances, and credit separate. Unfortunately, the answer to whether business loans impact personal credit isn’t that cut and dried.

While business loans can definitely impact your personal credit in many scenarios, it really depends on the type of business financing you apply for, in addition to how you acquired credit in the first place.

Key Takeaways

  • Some business loans require business owners to personally guarantee the debt, in which case they become legally responsible for repayment.
  • Certain business financing products do not require a personal guarantee, including invoice factoring and corporate credit cards.
  • The way a company is structured can also determine whether personal credit will see an impact.

When Business Loans Affect Personal Credit

Generally speaking, a business loan will impact your credit when a personal guarantee is required. According to the U.S. Small Business Administration (SBA), it’s common for business loans and business lines of credit to require a personal guarantee when funding is not secured with any type of collateral.

In the world of business financing, the term “personal guarantee” means that the loan requires the business owner to use their own credit to get approved, and that they agree to be legally responsible for repayment of the loan funds. Business loans that require a personal guarantee may also be difficult to get approved for if the business owner has a low personal credit score.

In addition to business loans and business lines of credit, some business owners may turn to alternative financing sources for their business operations. For example, they might use a consumer credit card to pay for equipment or payroll, or they might take out a home equity loan or a home equity line of credit (HELOC) to get the cash they need. These are additional scenarios where a business owner’s personal credit is on the line.

When Business Loans Don’t Affect Personal Credit

Some types of business financing don’t require a personal guarantee—these are scenarios where the loan won’t impact a business owner’s personal credit. For example, business loans that only require an Employer Identification Number (EIN) and not a Social Security number (SSN) during the application process are ones that don’t require a personal credit check or personal guarantee.

Invoice factoring is another type of business financing that doesn’t require a personal credit check. This type of financing lets business owners use unpaid business invoices as collateral for a loan; thus, there’s no requirement for a personal guarantee.

Business owners may also be able to get a corporate credit card with no personal guarantee, although companies that offer corporate cards tend to have strict requirements regarding the number of employees and annual business revenue that applicants need to have. The Brex 30 Card is an example of a corporate credit card that business owners can get without putting their personal credit on the line, but there are others.

It’s also possible that a business loan won’t impact personal credit if the business is incorporated and running as a limited liability company (LLC), a C corporation, or an S corporation, for example. In this scenario, the incorporation of a business helps shield the business owner from losing their assets if the company files for bankruptcy or faces a lawsuit. However, if someone is running their business as a sole proprietorship, then they don’t have the legal protections that come with incorporation.

How Business Loans Might Affect Personal Credit

At the end of the day, whether or not a business loan or a business line of credit impacts personal credit depends on several factors. These include:

  • Business structure
  • Business loan type
  • Personal guarantee requirement

Business Structure

As we mentioned already, incorporating a business comes with vast legal and financial protections, including the protection of certain personal assets. If a business operates as an LLC, a C corporation, or an S corporation and files for bankruptcy, for example, then personal assets like a home and a car have some protection.

That said, businesses that operate as a sole proprietorship and some partnerships don’t have the same financial protections. As an example, the SBA notes that limited partnerships have one business partner with unlimited liability and other partners with limited liability. In this scenario, the general partner with unlimited liability may be putting their personal assets on the line if their business fails.

Business Loan Type

We also noted how some business loans do not require a personal credit check, and that these loans do not impact personal credit in any way. Businesses that get financing through invoice factoring fall into this category, as do companies that qualify for corporate credit cards.

Personal Guarantee Requirement

If a business loan requires the owner to make a personal guarantee for the debt, this means they are legally responsible for repayment no matter what. The SBA notes that it’s common for unsecured business loans and unsecured business lines of credit to require a personal guarantee.

How Business Loans Affect Business Credit

Where individuals have personal credit reports and a personal credit score, the same can be said for businesses. In fact, Dun & Bradstreet, Equifax, and Experian are the three business credit reporting agencies that collect business credit data and assign business credit scores.

If a business fails to make payments on a business credit card or defaults on a business loan, then their business credit scores will see a negative impact. Like with personal credit, this means that the business may struggle to get approved for more financing in the future, or that it’ll have to pay higher interest rates and more loan fees if it is approved.

Tips for Getting a Business Loan

If you’re a business owner who needs to borrow money to keep your company afloat, there are steps you can take to get the financing you need. The following tips can help you find the right business loan for your needs.

  • Consider making a personal guarantee: If you have good personal credit and you’re willing to make a personal guarantee on a business loan, you’ll find a much larger range of options. For example, making a personal guarantee opens the door to a larger number of available business loans as well as business credit cards from major issuers like American Express, Capital One, and Chase.
  • Compare multiple business financing products: Decide whether you want a business loan that gives you a lump sum of cash upfront, or whether a business line of credit or business credit card could be what you need. 
  • Compare rates and terms across multiple lenders: Once you decide on the type of business financing you want, you should compare multiple lenders and credit issuers to find options with the lowest possible rates and ongoing costs.

Does a Business Line of Credit Affect a Personal Credit Score?

A business line of credit can impact a person’s credit score if a personal guarantee was required and the business fails to meet their financial obligations. In that case, the business owner would see a negative impact on their credit, and they would ultimately be responsible for paying the debt.

Do Business Loans Help Build Credit?

Business loans typically don’t build personal credit, as they don’t report business activity to personal credit reports. That’s even true when a personal guarantee is required. However, a business loan that requires a personal guarantee will report late payments and other negative activity to credit reporting agencies.

Do Business Loans Show Up on a Credit Report?

Negative business loan activity, such as late payments and default, can show up on personal credit reports if a personal guarantee was required.

Does LLC Debt Count as Personal Debt?

According to the SBA, having an LLC gives business owners protection for their personal assets. Further, LLC debt does not count as personal debt unless the business owner personally guaranteed the loan.

Can I Use a Business Loan to Pay Personal Debt?

While there may be no one to stop you from using business funding to pay off personal debts, serious legal and tax consequences can come into play if you do. For example, a concept called “piercing the veil” that comes about when business owners intermingle their business and personal finances can put their personal assets at risk.

The Bottom Line

Business loans can impact personal credit in a range of scenarios, just as poor personal credit makes it much more difficult to qualify for certain types of business financing. Ultimately, how business loans impact personal credit depends on the structure of the business, the type of business financing being pursued, and whether the business owner was required to make a personal guarantee.

If you’re a business owner who needs funding, these are all factors to keep in mind as you browse business loans and business lines of credit. You may be perfectly fine with putting your personal credit on the line to get the loan funds you need, but some types of business financing don’t require it.