Are Business Loan Approvals Based on Personal Credit?

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If you’re a small business owner, your personal credit will affect your ability to get approved for a business loan. But, not always with all business loans. The magnitude of your personal credit’s effect, however, depends on other factors too. The most significant of these factors include the type of lender, terms and amount of your loan, business’s debt repayment history, business’s capital structure, and current economic conditions.

These five factors, along with your credit score, are what traditional lenders use to determine the overall risk of lending to you. If these five factors determine that lending to you isn’t risky, your personal credit score is less important. Still, even if your personal credit doesn’t stop you from getting approved, it can make the business loan cost more expensive. So, if there’s room for improvement in your credit score, it’s certainly worth trying.

To help you tackle this goal, here’s how you can boost your personal credit prior to applying for a business loan.

How to Improve Your Personal Credit Score to Get Approved for Small Business Loans

#1: Understand How Personal Credit Scores Are Calculated

By understanding the numbers behind your personal credit history, you can get a notion of how to improve your score.

The breakdown of how the most common credit score, the FICO Score, is calculated revolves around these:

  • Amounts owed: 30 percent
  • Payment history: 35 percent
  • Length of credit history: 15 percent
  • Credit mix: 10 percent
  • New credit: 10 percent

The percentages listed above represent how significant each category is in determining your credit score.

#2: Make Your Payments On Time and In Full

The most important factor affecting your personal credit is your payment history. Hence, if you make a habit of paying your debts on time and in full, you’ll have a better credit history. As a result, you’ll be more likely to get approved for a business loan or other financing options, such as a merchant cash advance, business line of credit, and equipment financing. If you stay committed to making debt payments on time, you can improve your overall finances.

#3: Formulate Long-Term Plans

Since you’re using almost all of your credit each month, your credit score will inevitably hurt. To fix this, you could either request to increase your credit limit or apply for an additional business credit card.

If you get a new credit card, you’ll have access to more credit, but your score may decrease because you added new credit. However, as time goes by, that new credit will age, your amounts owed will decrease, and due to this your credit score will likely increase.

#4: Check Your Personal Credit Report for Errors

To check your report for errors, you’ll need to request your report from each of the three main credit bureaus. If you find an error, gather documentation and write a letter disputing the error, send your letter and supporting documentation to the credit bureau, and contact the lender who reported the incorrect information.

In Summary

Personal credit affects your business loans approval status, but what about the opposite? That is, does taking out a business loan affect your personal credit? It depends on your business’s financial situation. If you’ve personally guaranteed a business loan, or if you’re a sole proprietor, your business loan will affect your personal credit. Ultimately, your best bet is to pay your bills on time, keep your balances low, and educate yourself. The more you know about how personal and business credit scores work, the more empowered you will be to take action.