When you apply for a business loan, as part of the application review process, lenders assess your credit report in addition to your personal and business KYC documents.
When we help SMEs get business loans, two questions we’re almost always asked are “what information is in my business credit report?” and “my personal score doesn’t affect my business credit score, right?”.
To answer the first question, we broke down what information your business credit report contains here. The information within a business credit report is wide-ranging and is designed to provide an overall picture of your company’s finances and practices.
The short answer to the second question is: yes. Each person has two separate credit scores – one as a consumer and the other for your company – but your personal credit score does impact your business credit score. Continue reading to find out how!
Are My Chances of Getting Approved for a Business Loan Based on My Personal Credit Score?
If you’re worried that a poor personal credit rating will prevent you from securing a business loan, it might help to understand how credit scoring works and how the decision to lend is reached for a business loan.
Lenders can look at various aspects of your financial history, both business and personal, to understand how much risk you pose to them, how likely you are to repay the loan, and that you can repay it on time.
Will a Business Credit Card Provider Check My Personal Credit Score?
Obtaining business finance can be more difficult when a company has no history of borrowing. Commercial lenders have little information to indicate how the company will perform and whether it will meet the contractual terms of lending.
Personal credit is not necessarily a good indication of how a business will repay its debts, but if the company has not yet built up a credit rating, the lender only has this information to rely on when making its decision.
Some lenders use scoring software and tools that integrate personal and business credit scores when deciding to lend to you. This helps them come up with a combined outlook for the likelihood of repayment.
Do Lenders Always Consider My Personal Credit Score for a Business Loan?
Most lenders will at least look at your personal credit report when determining your eligibility for a business loan. However, some lenders put less weight on your personal credit score than others.
Depending on how good your business credit history is, lenders may put even less weight on a lower personal credit score.
In general, you can expect your personal credit score to matter more when you apply for a business loan when any (or all) of the following are true.
1. You’re applying for credit with a bank or other traditional lender
Traditional banks have strict requirements for lending governed by the Reserve Bank of India and can’t be very flexible. They make sure that their customers have an overall good credit profile.
Alternatively, if you apply for a business loan with an NBFC or a fintech, they assess your creditworthiness using alternative data points in addition to the traditional criteria banks follow. This is because they have developed innovative credit assessment tools that help them assess the risk in lending to you using alternative information. These alternative assessment methods are verified and approved by the financial authorities.
CreditEnable is one such fintech. We use technology and thousands of data points about your business to determine your eligibility for a business loan. If you aren’t eligible right now, we’ll help you understand why and recommend steps you can take to improve your creditworthiness. If you are eligible, we analyze your needs and submit your business loan applications to lenders who fit your credit requirements so that you can get their financing fast.
2. Your company is a start-up or an MSME
If lenders don’t have enough information to determine your creditworthiness from your business score, they will weigh your personal score more heavily. If you own a Sole Proprietorship or are an MSME with only a few employees, it may be hard for a traditional lender to see the distinction between your business’ credit history and your personal credit.
This is because your business may still be in its early stages and may not have a set (or well defined) business plan that can reassure lenders about your future finances. With limited business information available, they have no other choice but to use your personal credit score as an indicator of your business creditworthiness.
3. Your personal credit is considerably low
A few older negative items on your personal credit report shouldn’t make it difficult to receive a business loan, especially if your business’ credit history is strong. However, the more negative items there are on your personal credit history, the more a lender is going to take notice and factor it into their risk assessment.
This is because a lender may view how you handle your personal finances as an indication of how you may be managing your business finances. More negative items on your personal credit history suggest your business’ financial health is not very strong, reducing your chances of getting approved for the business loan you need.
In conclusion, your credit history — both personal and business — is only one factor lenders use to evaluate your business loan application. However, credit history is an important factor, and it can have a variety of effects on your ability to acquire the business financing you need. Your business and personal credit histories can affect:
- Whether or not you get approved for a business loan
- Your options for terms and payment schedules
- The interest rate on your loan
- The total amount of financing that lenders are willing to provide
Now that you know more about how your personal credit score affects your business credit score, don’t forget to check your credit report regularly to make sure there are no errors. Besides this, we also recommend checking your credit score before you apply for a business loan so that you know in advance how likely you are to be approved.