Does Your Personal Credit Score Play A Role In Applying For A Business Loan?

Your personal credit score can be an important factor when applying for a business loan. Furthermore, this street goes both ways. A business loan can affect your personal credit as well.

The specific structure of the business plays a significant role in determining how much this comes into play.  Also important is whether or not you have accepted personal responsibility for guaranteeing that the loan will be repaid.

Did you sign a personal guarantee for loan repayment in the event the business is unable to do so? If so, then your personal credit score is at risk.  Did you use personal funds or credit cards to fund the loan,? If so,  your personal credit score may be affected as well.

If Your Personal Credit Score Might Suffer, Is It Worth The Risk?

Your Personal Credit Score to Help Determine if You Qualify

Only you can decide the risk/benefit balance that you are willing to assume. Everyone’s circumstances, both personal and business, will differ to some degree. It is likely that, even if you are a sole proprietor, there will be someone with whom you need to discuss the pros and cons of applying for a business loan.7

Are you starting up a business, salvaging one hit hard by the pandemic or taking a business to the next level? Each of these situations requires enough funding to do so successfully.

It Takes Money To Make Money, Right?

A business owner needs adequate capital to run their business. If you do not have the necessary funding, your business will be negatively affected. In 2017, a report from the United States Business Administration Office of Advocacy shared some vital data with us.

From that report, we learned that businesses at both extremes of age noted a decline in their profits due to a lack of adequate funding. The report states that 15% of businesses not yet two years of age and 7% of those older than sixteen years were significantly affected by the lack of suitable funding.

Also, according to the SBC survey published by the Federal Reserve in 2017, there was a 5% decline in the number of small businesses that applied for one form of financing or another. (from 45% to 40% in one year’s time).

Of note, only 58% of those applying for a business loan was given the full amount requested. However, 82% of the applicants were allotted some degree of financing.

Let’s Talk About Your Personal Credit Score

How important is it to have a high credit score?  Obviously, loan approval is more likely to be awarded to those with a high credit score than to those with a mediocre or low credit score. Nevertheless, some applicants with a less than desirable credit score may still be approved.

Each lending institution has its own small business loan requirements. For example, loans will be approved to someone with a poor credit score in the 300-579 range if other criteria are met.

They would most likely require evidence that the business is both making a profit and that you have a high annual revenue as well.

Some lending institutions require traditional components to evaluate an application. They tend to take a harder line on what is an acceptable application. They will require credit scores in the good -to -excellent range, adequate collateral in addition to a well-developed business plan.

However, there are also alternative lenders. These institutions are more likely to have less stringent requirements than do the traditional institutions for a small business loan.

So, while it is easier to obtain a business loan if you have good to excellent credit, all is not lost if you do not. There options for persons with less than stellar personal credit scores. You may have to apply for a loan with alternative lending institutions.

Having collateral helps but there are people who have obtained loans without it. You do need to have a well thought out and fully developed business plan.

Where Do You Start?

Obtain copies of both your personal and business credit scores. Until you have this information, you really cannot get much further in the process. Once you have copies of all of your credit reports, some of the next most important steps will include the following.

• Develop and write up a cogent business plan
• Clearly define your collateral
• Try to find a co-signer
• Research all options based on your credit scores

Just What Constitutes Collateral?

Accounts Receivable and your personal credit score are both important

In the context of applying for a business loan, collateral is basically any asset belonging to the business that has value. It is something that, if necessary,  the lender could sell to help pay off the loan. Examples of business collateral are as follows.

• Accounts Receivable
• buildings
• equipment
• inventory
• vehicles

Do Your Personal Credit Score and A Lack of Collateral Matter If Applying For A Federally Backed Loan?

Not all federally backed loans have the same requirements. The loan backed by the SBA (Small Business Administration) does not commonly require collateral. This true for established businesses as well as for businesses just getting started.

However, there are a few SBA loans that may have collateral requirements so be sure to verify this fact before making an application if you do not have collateral to offer,

Usually, the minimum SBA loan requirement for credit scores will be in the 520-640 range. However, if your credit score is less than this, they do not automatically deny your application on that fact alone. There are other factors that they take into consideration when reviewing your application for a loan.

These factors might include the history of how well you have made certain payments. They made include the following.

• rent
• utilities
• insurance
• other payments made consistently and on time

They also look at your recent history of income and whether or not you qualify for SBA disaster loan.

The Initial Paycheck Protection Program Has Ended

The PPP was an SBA loan created in response to the COVID9 crisis in an effort to help businesses keep their workforce employed. It was officially launched on April 3, 2020. and ended on August 8, 2020.

Although the initial PPP funding round has closed, the Republicans are making every effort to offer a second round of PPP funding. Currently, no more PPP applications are being accepted.

Once the next PPP has been approved, the rules governing who will qualify will be more stringent. The second PPP loans will be under the auspices of the HEALS Act. They will offer a little bit more freedom in how they may use the funds but the eligibility requirements will be tighter.

The major changes will be as follows.

• Loans will only be made to small businesses with no more than 300 employees
• Their eligibility is based on them being able to verify a minimum of 50% decline in their revenue when compared to a quarter of a previous year.

What Is An EIDL Loan?

EIDL stands for Economic Injury Disaster Loan. Although the time to complete an application is based on each case individually, on average, the application process will take at least 21 days.

Photos Courtesy of Pixabay

Sources:

https://loans.usnews.com/business-loans-for-bad-credit

About SBA

• Economic Injury Disaster Loan