When you are starting a business and need funding, you can’t just ask a bank for a loan on good faith. Before your business builds its own financial history, lenders are going to look at your credit report to approve or deny your business loan. If you have strong credit, you will have access to larger loan amounts and better terms. If your credit is weak or in bad shape, you might struggle to get the financing you need. 

Here is what you need to know about how your personal credit shapes your ability to get a business loan and what you can do if your credit needs a boost.

The Fair Credit Reporting Act (FCRA) is on your side

First and foremost, before attempting to take out a business loan, start by cleaning up your personal credit. Pull your free credit report from Experian, Equifax, and TransUnion to find out where you stand. Most importantly, look for errors, outdated accounts, and inaccurate negative marks on your report. These mistakes can completely ruin your ability to get funding for your business. The good news is that you’re not stuck with these errors. You have rights under the FCRA to dispute inaccuracies and force the credit bureaus to investigate.

If you discover an error, file an official dispute with the credit bureaus to have it removed. This is the only way to remove inaccurate late payments, balances, and accounts from your credit report. Once disputed, the FCRA gives credit bureaus 30 days to investigate. If they can’t verify the information, they have to remove it. This can work in your favor since even a 50-100 point increase in your credit score can lead to significantly lower interest rates. The key is to get your score above 620, and if you can get it to 760, you’ll get even lower rates. If you run into any problems, contact a consumer protection attorney to pursue your right to correction.

Lenders Use Your Personal Credit to Assess Business Risk

When your business is brand new, it doesn’t have a financial history for lenders to review. The only way lenders can make financial decisions is by looking at the business owner’s credit report. This is why startups get evaluated based on the owner’s personal credit history. Naturally, higher credit scores improve the chance of loan approval. Lower scores don’t necessarily bar a business from approval, but the terms will be stricter, and interest rates will be higher.

Better Credit Unlocks Lower Interest Rates

Getting approved for a loan is nice, but high interest rates can cost you a ton of money. Your credit profile generally determines your interest rate. The better your profile, the lower your interest rate. Over time, even a small difference can add up to thousands of dollars. And for most businesses, higher interest rates make it harder to grow and create cash flow problems. 

Sometimes, Vendors Check Personal Credit

Having strong personal credit can help you grow your business faster. It is not just the banks that care about your credit. If you are working with a supplier trying to get extended payment terms, they might also check your credit. For example, vendors are more likely to approve “Net-30” or “Net-60” terms for business owners with good credit. If your business is new and has no established credit profile, vendors will require that you have good personal credit.  

Personal credit affects your ability to lease space and equipment

If your business needs to operate out of a physical space or use expensive equipment, your personal credit will be used to negotiate those terms. For instance, potential commercial landlords will review your personal credit before approving your tenancy. Equipment lenders will also evaluate risk based on your personal credit. If your credit is good, you will have lower down payments and get better terms. Weak credit will likely require a higher deposit and stricter lease conditions, which can limit access to capital and slow growth. Beyond traditional loans, some business owners tap into home equity as a line of credit extended against their property, which is another option where strong personal credit directly determines the amount and terms you qualify for.

Small Business Loans Often Come With Personal Responsibility

Many small business loan lenders require personal guarantees. This means your personal credit is directly tied to your business repayment, even if your business has established credit. In these situations, if your business defaults, your personal credit will take the hit. Having strong personal credit from the start gives you a better chance at securing favorable terms in this situation.

Build Your Credit First, Then Build Your Business 

Even when you have the best idea and a clear plan, weak personal credit can make it hard to start your business. To avoid unnecessary obstacles, fix your personal credit first and then start building your business.

Photo by Sasun Bughdaryan: Unsplash