Is Your Business Line of Credit Hurting Your Personal Credit? What Lenders Keep Hidden
Your entrepreneurial venture may be covertly harming your creditworthiness, and you might not even realize it. An astonishing 73% of small business owners lack knowledge of how their business credit decisions impact their personal finances, potentially leading to massive losses in higher interest rates and denied personal loans.
So, can a business line of credit impact your personal score? Let’s delve into this essential question that could be secretly determining your financial future.
Do Lenders Check Your Personal Credit for a Business Line of Credit?
When requesting business financing, will lenders examine your personal credit score? Absolutely. For startups and early-stage firms, lenders nearly universally perform a personal credit check, even for company loans.
This credit check results in a “hard pull” on your credit report, which can temporarily lower your personal score by 5-10 points. Several inquiries in a brief period can compound this effect, indicating potential economic instability to creditors. As you apply repeatedly, the greater the risk to your score on your personal credit.
What’s the Impact Once You’re Approved?
After securing your business credit line, the situation gets trickier. The effect on your personal credit hinges primarily on how the business line of credit is organized:
For single-owner businesses and personally guaranteed business credit lines, your repayment record typically reports on personal credit bureaus. Missed deadlines or loan failures can cripple your personal score, sometimes causing a drastic decline for serious delinquencies.
For properly structured LLCs with business credit lines independent of personal liability, the activity may remain separate from your personal credit. Yet, these are increasingly rare for small businesses, as lenders often require personal guarantees.
Protecting Your Personal Score While Accessing Business Credit
How do you shield your personal finances while still obtaining corporate credit? Consider these approaches to minimize risks:
Establish Clear Separation Between Personal and Business Finances
Form an LLC or corporation rather than working as an individual owner. Keep strict separation between individual and company finances to protect your credit.
Develop Robust Corporate Credit Independently
Obtain a D-U-N-S number, set up credit accounts with partners who report to business credit bureaus, and maintain perfect payment history on these accounts. Robust corporate credit can minimize the need on personal guarantees.
Look for Lenders Offering Soft Inquiries
Choose creditors who offer “soft pull” prequalifications ahead of official requests. This limits hard inquiries on your personal credit, safeguarding your score.
How to Handle an Existing Credit Line Impacting Your Score
What if you already have a business line of credit impacting your personal score? Implement solutions to reduce the damage:
Ask for Corporate Credit Reporting
Reach out to your creditor website and request that they report activity to commercial credit institutions instead of personal ones. Certain creditors may accommodate this change, particularly when you’ve demonstrated reliable payment history.
Refinance with a Better Lender
When your company’s credit improves, look into switching to a lender who doesn’t report to personal credit bureaus.
Is It Possible for Business Credit to Help Your Personal Score?
Surprisingly, a business line of credit can help. When used correctly, a personally secured business line of credit with consistent on-time payments can enhance your credit profile and show creditworthiness. This can possibly increase your personal score by a significant amount over time.
The key is utilization. Ensure your credit line usage stays under 30% to optimize credit benefits, just as you would with personal credit cards.
The Bigger Picture of Business Financing
Understanding the impact of business financing extends beyond just lines of credit. Corporate financing can also influence your personal credit, often in unexpected ways. For example, SBA loans come with undisclosed challenges that over 80% of entrepreneurs aren’t aware of until it’s costly. These can include personal guarantees that tie your personal score to the loan’s performance, potentially leading to prolonged credit issues if payments are missed.
To avoid pitfalls, stay informed about how different financing options interact with your personal credit. Work with a credit expert to manage these complexities, and consistently check both your personal and business credit reports to address concerns promptly.
Protect Your Financial Destiny
Your business shouldn’t jeopardize your personal credit. By understanding the risks and taking proactive steps, you can access the financing you need while safeguarding your personal financial health. Begin immediately by evaluating your business credit and applying the advice given to minimize risks. Your economic stability depends on it.