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 three-quarters of small business owners lack knowledge of how their business credit decisions affect their personal finances, potentially resulting in significant expenses in increased loan fees and denied personal loans.
So, will a business credit line influence your personal creditworthiness? Let’s delve into this critical question that could be secretly determining your financial future.
Will a Business Credit Line Application Affect Your Personal Score?
Upon seeking a business credit line, will lenders check your personal credit score? Most definitely. For small businesses and sole proprietorships, lenders nearly universally perform a personal credit check, even for business financing.
This credit check triggers a “hard pull” on your credit report, which can briefly reduce your personal score by a few points. Repeated credit checks in a short timeframe can exacerbate this effect, signaling potential economic instability to creditors. As you apply repeatedly, the greater the negative impact on your personal credit.
What Happens After Approval?
Once you’re approved for a business line of credit, the situation gets trickier. The effect on your personal credit relies heavily on how the business line of credit is set up:
For sole proprietorships and individually secured business credit lines, your payment history is usually reported on personal credit bureaus. Delinquent accounts or loan failures can devastate your personal score, sometimes reducing it significantly for serious delinquencies.
For well-organized corporate entities with business credit lines without personal guarantees, the activity typically stays isolated from your personal credit. Yet, these are harder to obtain for emerging firms, as lenders often require personal guarantees.
Ways to Shield Your Credit from Business Financing
How can you protect your personal credit while still accessing business financing? Here are some strategies to minimize risks:
Establish Clear Separation Between Personal and Business Finances
Incorporate as an LLC or company rather than running a solo business. Maintain pristine financial boundaries between personal and business accounts 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 website credit bureaus, and maintain perfect payment history on these accounts. Robust corporate credit can reduce reliance 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
If your current credit line is affecting your personal credit, what can you do? Take proactive steps to mitigate the damage:
Ask for Corporate Credit Reporting
Contact your lender and inquire that they report activity to commercial credit institutions instead of personal ones. Some lenders may accommodate this change, particularly when you’ve shown consistent repayments.
Refinance with a Better Lender
When your company’s credit improves, look into switching to a lender who focuses on business credit.
Could a Business Credit Line Improve Your Credit?
Unexpectedly, yes. When managed responsibly, a personally guaranteed business line of credit with regular timely repayments can broaden your credit portfolio and demonstrate financial responsibility. This can potentially boost your personal score by up to 30 points over time.
The critical factor is credit usage. Maintain low balances relative to your credit limit to enhance your score, just as you would with individual credit accounts.
The Bigger Picture of Business Financing
Grasping how corporate credit affects you is broader than just lines of credit. Corporate financing can also influence your personal credit, often in surprising manners. For example, Small Business Administration loans come with unforeseen pitfalls that 82% of entrepreneurs aren’t aware of until it’s too late. These can include individual liability that tie your personal score to the loan’s performance, potentially resulting in lasting harm if payments are missed.
To stay ahead, learn more about how different financing options interact with your personal credit. Consult with a financial advisor to manage these complexities, and consistently check both your personal and business credit reports to address concerns promptly.
Protect Your Financial Destiny
Your business must not undermine your personal credit. By knowing the consequences and implementing smart strategies, you can secure necessary funding while protecting your personal financial health. Take action now by assessing your existing financing and implementing the strategies outlined to minimize risks. Your economic stability depends on it.