How Are Business and Personal Credit Connected?
You start your business on a sound footing by separating business and personal expenses, which starts to build a business credit history apart from your consumer credit score. Though distinct, the two credit profiles can still affect each other. See how both ratings are intertwined and how to protect your scores.
How Business Credit Influences Personal Credit
Your company’s credit history begins when you set your business up as an entity and create financial accounts for the firm. The age of your credit, payment history, utilization, and recent inquiries affect your score, which falls between 1 to 100.
Business scores are public info, all the more reason to work diligently to keep a high rating. Business credit cards decide whether to report your activity only to business bureaus or also to alert consumer credit bureaus. The additional account on your personal credit file affects the total utilization ratio, and a high balance could hurt your score. Likewise, on-time payments and low utilization can boost your personal score.
When applying for a business card, the lender pulls your consumer file for approval, and a hard pull temporarily lowers your personal credit score. Because you must give a personal guarantee to pay off debt, lenders need to ascertain your level of responsibility, and the best way to do so is by checking your personal credit. Only make credit requests as necessary to avoid unnecessary dings to your rating.
How Personal Credit Influences Business Credit
If lenders look at your personal credit and see your score isn’t high, you might not be approved for a loan or card. Traditional lenders prefer to see excellent scores (above 720) or at least good scores (above 660). Financial fraud kills almost any conventional financing option. It is nearly impossible to get a traditional business loan if you have a felony, a bankruptcy within the last six months, or unpaid tax liens. Vigilantly attend to personal credit so you can secure business loans when needed.
How To Find Financing If You Have Poor Credit
When conventional lenders turn you away, look to alternative lending to secure financing. Alternative lenders check for cash flow and a good business plan for loan approval. Alternative lenders rarely pull credit history and are more concerned with the state of your balance sheets, tax returns, debt ratios, and profit and loss statements.
Business and personal credit are linked to give financial institutions a well-rounded view of your reliability. By taking care of both profiles, you can open up your options for funding.
Do you want to start a business? If so, you may have thought about SBA loans. Even though a lot of people start by funding their startup business with their personal savings, this is only going to go so far. Eventually, you will need to generate another source of capital, particularly if your business is not generating a lot of revenue just yet. How can you choose the right loan to meet the needs of your company?
Think About the Interest Rate
First, you need to think about the interest rate attached to the loan. The lower the interest rate, the better the loan. There are a number of factors that will influence your interest rate. These include your overall credit score, the size of your business, and the current market. You should always talk to multiple lenders to try to figure out how you can get the lowest interest rate possible.
Consider the Repayment Period
Next, you need to think about the repayment period. Along with the interest rate, this will be the biggest driving factor in the size of your monthly payment. How long do you think it will take you to generate enough money to pay back the loan? You need to factor this into your decision. A lot of lenders will be willing to customize your repayment period to meet your needs, but this could have an impact on your interest rate. Think about this when looking at SBA loans.
Think About How You Will Use the Loan
Finally, you also need to think about how you will use the loan. The lender will probably ask you why you are applying for a business loan. Maybe you need to purchase more equipment. Perhaps you need to hire more employees. Maybe you need to do more research and development. Make sure you have a clear plan of action for that long when you apply for it. This can maximize your chances of getting approved.
Find the Right Loan for Your Business
These are just a few of the most important factors you need to keep in mind if you are trying to find the right loan for your business. There are plenty of lenders available, and you may have thought about SBA loans. Make sure you understand just how much money you need before you apply for a loan. Then, take a look at the interest rate and the repayment period before you sign.