Yes, business borrowing can affect your credit score and personal finances.

For many small- and medium-sized businesses a loan can be the key to getting started or expanding. A common question heard by our commercial loan officers is, “Will getting a business loan affect my personal credit?” In many cases, the answer is yes. Let’s take a closer look at when and how business borrowing might affect you personally.

Is the business loan backed by a personal guarantee?

It’s very common for lenders to require a personal guarantee for small business loans. For example, SBA loans require a guarantee from all owners who have more than a 20% stake in the business. When you provide a personal guarantee on a business loan you’re expected to pay the debt if the business is unable to. When applying for the loan you’ll have to show ability to repay the loan through cash, investments or collateral.
Collateral is any asset that may be sold for cash and may include things like vehicles or real estate. If collateral is used to get a loan, the specific assets to be used for this purpose will be named in the loan documents. Loans that use collateral are called secured loans.

Also, while businesses set up as LLCs keep personal and business finances separate, agreeing to provide a personal guarantee for a loan taken out by the business means you’re legally bound to repay it.

How does a personal guarantee work?

When you sign a lending agreement with a personal guarantee you become a guarantor who promises to repay the loan. The best case scenario is that the business thrives and makes payments as scheduled. If the business faces trouble and can’t repay the loan, lenders turn to the guarantor(s) for payment.

Loan guarantors called on to repay business debt have a few options. The simplest is paying cash to cover the debt. If cash is not available, the lender may seize collateral to satisfy the loan. If the collateral is your home, you can see how complicated it becomes if you’re a guarantor on a business loan in default.

How business loans can affect personal credit

Credit reports don’t show when you’ve personally guaranteed a loan, but your credit score could be affected.

When the lender runs a hard inquiry on your credit report while making a decision on the business loan, your credit score could drop a few points. The hard inquiry will influence your credit score for a year and remain on the record for two years.

Get your business loan questions answered

The Consumer business services team works with local businesses and takes pride in helping customers reach their goals. Call us at 800.991.2221 or contact one of our commercial loan officers online to get answers to all your business loan questions.

 

All loans subject to approval. Rates, terms, and conditions are subject to change may vary based on credit worthiness, qualifications, and collateral conditions.