If you’re starting a business or applying for a business loan, your personal credit score will likely influence your company’s ability to receive financing—even if you’re trying to keep your business completely separate from your personal finances.
In most cases, your personal credit score affects your business. Entrepreneurs and established business owners often use personal financing when they can’t find alternative lenders, and their credit plays a huge role in their approval.
In order to secure the best situation for your business, your personal credit must be in order. It’s also important to consider what type of business you want to own, and how you plan to run and fund your business throughout its lifecycle.
Whether you’re just starting out or you’ve been running your company for many years, your legal structure matters. Today, businesses can incorporate in several ways—each of with influence your ability to qualify for business financing differently.
In general, the majority of businesses are sole proprietorships, partnerships, limited liability companies, corporations and subchapter corporations.
If you are among the majority that found a sole proprietorship, your personal credit will be considered when you apply for business financing.
When it comes to Limited Liability Companies, personal credit matters, too. In this case, personal credit has less of an impact than it does in a sole proprietorship, but it is still weighted heavily by lenders.
Corporations and subchapter corporations function independently, so their credit is generally independent from a founder’s credit history. In some cases—like applying for a new line of credit for a corporation—your personal credit will be evaluated.
Getting Your Foot in the Door
Your personal credit matters for your everyday business affairs—it can make or break potential financing for your company.
Your credit score indicates how well you handle money, so it must be the best it can be before you apply for business financing. If you are currently unfamiliar with your score, the first step is to obtain a free credit report.
Once you know your score, the next step is to look over the factors helping and hurting your credit. According to CreditRepair.com, negative credit factors influence your loan applications, interest rates, insurance premiums and savings. Improving your score will help you and your business benefit—saving you money and potential stress.
If you want to improve your credit on your own, several online sources can help you. If you are not an expert in financing, though, you will want to work with a credit repair company that can help save you time searching and expedite your credit’s improvement.
Once you have an understanding of how your personal credit influences your business, there is one last thing to consider: For every action, there is an equal and opposite reaction.
Your personal credit score affects your businesses financing, and applying for business financing affects your personal credit score; when you apply for business financing, your credit score can take a hit.
When you apply for credit, the lender you apply with will pull your credit to decide if they’d like to extend financing to you. Although they can do something called a soft pull or a hard pull, they generally conduct a hard pull, which can influence your credit score negatively.
Some hard credit pulls are understandable and permitted, but the more you have, the worse off you are—as each one can lower your credit score by 1-5 points.
As you apply for business loans, it’s important to protect your score. Before meeting with a lender, take time doing your research. Next, meet with the lender, and discuss what type of credit pull they will do so you can minimize the impact of their inquiry.
After you pull your free credit score and become familiar with your current standing, ensure you review it to correct any incorrect items. If everything is correct, consider working with a credit repair expert that can help you further asses the items on your credit and craft a plan for having them removed.
It’s important to be mindful of how your personal and business credit play off one another—regardless of how your company is incorporated. Today, your credit affects just about everything in your life, so maintaining a good credit score can save you thousands and thousands of dollars and protect your business for years to come.
This post is part of our contributor series. It is written and published independently of TNW.
This post is part of our contributor series. The views expressed are the author's own and not necessarily shared by TNW.