Are Business Loans Based on Personal Credit?

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How Can Personal Credit Affect Your Chance of Getting a Business Loan

Businesses can obtain loans through various means, and one common factor considered by lenders is the personal credit of the business owner. Personal credit plays a significant role in loan approval, particularly for small businesses or startups with a limited credit history.

When assessing a business loan application, lenders often evaluate the borrower’s creditworthiness, including examining personal credit scores and history. This check helps lenders determine the risk associated with lending money to the business. The individual credit assessment typically involves several factors.

Your Credit Report and FICO Score

Lenders use credit personal credit scores as an essential factor in evaluating the business owner’s creditworthiness. Your personal credit score is the same thing as your FICO score. FICO is an acronym for Fair Isaac Corporation, which developed the FICO credit scoring models that 90% of reputable lenders use.

Experian, Equifax, and TransUnion are the three main organizations that collect credit information. It is important to note that your FICO score may not be the same depending on which agency is reporting it because their models for calculating your score are slightly different. In addition, the models are also adjusted based on the type of lender. For example, your FICO score reported to a car dealership or credit card company may differ from the one reported to a bank.

Your FICO score is calculated based on your credit report. Your credit report includes personal details, credit history, credit inquiries, and public records. Personal details include your name, address, Social Security Number, date of birth, and employment information. Updates to this information come from the details you give to lenders when you apply for new credit. Your personal information is not used in the calculation of your FICO score.

Much of the rest of the information in your credit report is relevant to your FICO score and weighted differently to calculate your score in five categories.

  • Payment history – 35%
  • Amounts owned – 30%
  • Length of credit history – 15%
  • New credit – 10%
  • Credit mix – 10%

How Your FICO Score Can Affect Your Business Loan

Your FICO score can influence your chances of obtaining a business loan and its details in various ways.

Loan Approval

Lenders view a good credit score as an indicator of responsible financial behavior and lower risk. It demonstrates your ability to manage debt and make timely payments.

Loan Terms

A higher credit score can result in more favorable loan terms, including how much the loan will cost you in interest fees. Lenders may provide better terms to borrowers with good credit scores because they perceive them as less risky.

Loan Amount

A higher credit score can allow you to secure a larger loan. Lenders have confidence in your capacity to repay the borrowed amount.

Collateral Requirements

Lenders may require additional collateral to secure the loan if your credit score is on the lower end. Collateral provides them with a form of protection in case of default. A high credit score may help you avoid or reduce collateral requirements.

How Can You Improve Your Credit Score

Improving your credit score is a subtle process that requires consistent effort and responsible financial behavior. Some strategies to help improve your credit score include:

Pay Your Bills on Time

Pay all your bills timely, including credit card payments, loan installments, and utility bills. Set up automatic payments or reminders to meet all due dates.

Reduce Credit Card Balances

High credit card balances can negatively affect your credit utilization ratio, which compares your credit card debt to your credit limit. Aim to maintain your credit utilization below 30% of your available credit. Pay down your balances or spread them across multiple cards to lower your overall utilization rate.

Regularly Review Your Credit Report

Ask for your credit report from one of the three main credit bureaus once a year. Review the information for errors or inaccuracies that may negatively impact your score. If you find any errors, report them to the respective bureau to have them corrected. You are allowed one free credit report per year from each of the main credit reporting bureaus, Equifax, Experian, or TransUnion.

Maintain a Mix of Credit Types

A diverse mix of credit accounts, such as credit cards, loans, and mortgages, can positively influence your credit score. However, don’t open new accounts solely for diversification. Only take on credit that you need and can manage responsibly.

Consider Credit-building Tools

If you have a lean credit history, you can explore credit-building tools such as becoming an authorized user on someone else’s credit card or getting a secured credit card from a bank. Some banks even have products like credit builder loans to help you increase your credit score. These options can help you establish and improve your credit history.

Payment History

Lenders consider your payment history to reflect your ability to manage borrowed money and fulfill financial obligations. Your payment history can impact your chances of obtaining a business loan.

Lender Confidence

A positive payment history demonstrates your reliability and financial responsibility. Lenders prefer people who have a history of making payments as agreed.

Creditworthiness Assessment

Lenders analyze your behavior to predict how likely you are to make timely payments on a new loan. A track record of missed or late payments can raise concerns and lower your chances of loan approval.

Debt-to-income Ratio

Your debt-to-income ratio (DTI) is a critical factor that moneylenders consider when assessing your eligibility for a business loan. DTI involves the comparison of your monthly income to your monthly debt payments and provides insight into your financial health and ability to take on additional debt. Your debt-to-income ratio can affect your chances of getting a business loan.

Lenders use your DTI to evaluate the level of financial risk associated with approving your loan application. A high DTI indicates that a significant portion of your income is already allocated towards existing debt obligations. This can raise concerns about your capacity to handle additional debt and repay timely loans.

To improve your likelihood of getting a business loan based on your debt-to-income ratio do not add debt. If you plan to apply for a business loan in the near future, avoid taking on new commitments, such as credit card balances or personal loans. Minimizing new debt can help keep your DTI ratio in check.

If you have a large amount of debt, you can also provide detailed information to improve your chances for approval. Provide accurate and comprehensive financial information showcasing your ability to manage existing debts and support repayment. This information should include financial statements, cash flow projections, and a clear explanation of how you plan to use the loan funds.

Bottom Line

Personal credit plays a significant role in the approval process for business loans, particularly for small businesses and startups that may still need to establish their credit profile. Lenders often assess the personal credit of the business owner or a key stakeholder to gauge their financial responsibility and ability to manage debt.

Your personal credit assessment includes credit scores, payment history, outstanding debt, and credit utilization. A higher personal credit score and a clean credit history improve the chances of loan approval and may lead to more favorable loan terms.

While personal credit is essential, lenders also consider other factors when evaluating business loan applications, such as the business’s financial health, cash flow, industry trends, and loan purpose. By focusing on responsible financial behavior and building a positive credit history, business owners can increase their chances of obtaining business loans and securing more favorable loan terms.

How Can ABC Biz Loans Help You Secure a Business Loan?

American Business Credit is a reputable financial institution specializing in providing loans and financial solutions to businesses in the United States. Whether you’re a small startup or a veteran company, we offer a range of loan options and services to meet your particular needs and help you reach your business goals.

Loan Options

We offer a range of loan options tailored to meet your business’s particular needs. Our team members can assist with various types of loans, including working capital loans, equipment financing, commercial real estate loans, inventory purchases, and business lines of credit.

Loan Application Assistance

Our professionals can guide you through the loan application process. Their experience working with many different kinds of businesses allows them to help you gather the necessary documentation, complete application forms accurately, and navigate the lender’s requirements. This assistance can streamline the application process and increase your chances of loan approval.

Lender Connections

The team at American Business Credit has established relationships with lenders and financial institutions. They can leverage these connections to match your business with suitable lenders who are more likely to provide the financing you need. Their relationships can save you effort, money, and time finding lenders independently and increase your access to loan options.

Personalized Approach

Our experts take a personalized approach to understanding your business’s unique financial situation and goals. They can assess your needs, analyze your financials, and recommend loan options that align with your requirements. Their expertise allows them to tailor solutions that suit your specific circumstances and increase the likelihood of loan approval.

Support and Guidance

Professionals at American Business Credit provide ongoing support and guidance throughout the loan process. They can answer your questions, address concerns, and offer expert advice on optimizing your loan application. Their expertise and industry knowledge can also provide valuable insights to help you make informed decisions.

Fast and Efficient Service

At American Business Credit, we understand the importance of timely business financing. We aim to provide fast and efficient service, helping you secure the funds you need within a reasonable timeframe. Contact  American Business Credit today to get started!

Kayleen M
Kayleen M
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American Business Credit exceeded my expectations! They were so helpful from the very beginning of the process to the end. Everyone I came into contact with were very professional and had valuable incite to help me with any hesitations and questions that I had. I am very impressed with the service they provided. Craig Johnson was my main advisor through this process and I would high recommend him based on his expertise, guidance, and service he provided to me as a client. Any financial needs I have in the future I will be a returning customer of American Business Credit. Thank you Craig for all your hard work.
Derek J
Derek J
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American Business Credit was extremely knowledgeable, professional, and helpful from start to finish. My loan processor Craig was extremely helpful, answering all of my questions as they arose. They delivered the exact results promised during our first call in a timely manner. Highly recommend.
Eduard A
Eduard A
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I am so glad I found ABC, every company or lender I talked to told me we needed to have revenue on our business to get a loan, well we are a start up, and need the loan to get started generating revenue. ABC was able to get us funded at great rates in a short amount of time. I definitely plan on using them again as our business grows!
Erik R
Erik R
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Amazing! Kina Jackson was sooooo helpful and made the process a breeze! We weren't sure what we could get as a start-up and needed a ton of equipment to get our business going. Kina dug deep and found us what we needed to fund our equipment needs and we can't thank her enough! Thanks again Kina and American Business Credit! Stop by the store next time you're in Vegas! - Erik Rogers, Veg-In-Out Market
Cassandra M
Cassandra M
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Kina was amazing to work with. As a new business owner and limited credit history, she really went to bat to ensure my business plan was heard by the lenders, so they felt confident in investing with me. Highly recommend!!

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