What small business owners need to know about a loan

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SAN JOSE, California., June 2, 2021 / PRNewswire / – Many small business owners use their personal loans when they are just starting their business or during downturns. However, your business may also have its own – completely separate – credit profile. Business lending can help you save money and grow your company. But for many small business owners, a personal loan can still be an important factor when qualifying for business financing.

For more information on loans and credits visit the myFICO blog at https://www.myfico.com/credit-education/blog

Difference between personal and business loan

Your personal loan depends on your credit reports from the main consumer. credit bureaus – Equifax, Experian and TransUnion. Your lenders, such as lenders and credit card issuers, report your account information to the credit bureaus. Then your FICO® Evaluations based those credit reports.

In the same way, once a business is set up as a limited liability company (LLC) or corporation, it can also create its own business credit file. Business credit reports are managed by Dun & Bradstreet (D&B), Equifax and Experian – the latter two have separate consumer and commercial credit databases.

Lenders and business suppliers can report their bills and payments to credit bureaus, which can then create credit reports. There are also business credit ratings such as FICO.® Small Business Scoring Service℠ (FICO SBSS) that lenders can use to assess the creditworthiness of a business.

Unlike consumer FICO® The FICO SBSS score ranges from 300 to 850, the FICO SBSS score ranges from 0 to 300 and is used by many small business lenders to evaluate applications for other types of business financing.

How a business loan can help business owners

Creating and building up a business loan for your company can help the company:

  • Get better business loans and lines of credit
  • Get lower rates on business insurance
  • Get longer lead times from sellers and suppliers
  • The right to participate in government and corporate contracts
  • Raise money from investors

In short, a good business credit rating can help you save money, smooth cash flow, and grow your business.

In some cases, your business’s financial records and history of relationships with suppliers or partners may be more important than its credit ratings. But establishing a good business credit rating can still give you an edge in the long run.

Why Your Personal Loan Still Matters

Over time, some companies grow to such an extent that lenders offer them loans or lines of credit solely on the basis of the finance and credit of the business. However, this is not the case for most small businesses.

While a strong business credit profile can help you qualify for the best funding, be aware that:

  • Many lenders will still check the personal loans of business owners.
  • There may be a minimum consumer FICO® Appraisal requirements for all business owners
  • Some business credit ratings include personal loan owners

Even if your business qualifies for a loan without a personal credit check, you may still need to sign a personal guarantee. A guarantee means that you are personally liable for the debt if the company cannot afford to make payments.

Separate your business and personal finances

As a small business owner, the success of your business can be closely tied to your personal finances. However, it is important to separate your business finances from your personal finances.

For example, if you are using a personal credit card for business expenses, you may have high utilization rate it hurts your personal FICO® Glasses. As a result, you may have problems with qualifications or getting less favorable rates on a credit card or loan, even if it is for personal use. Having a business credit card or business line of credit that is not reported to the consumer credit bureau may be the best option.

Similarities Between Your Business and Personal Loan

Your business and personal credit reports are completely separate, but there are some similarities in these processes. Here’s a quick overview.

Business loan

  • Create a business structure (e.g. LLC or corporation)
  • Register your business with D&B
  • Open credit and term accounts, which are reported to the credit bureau.
  • Pay your loan payments on time
  • Pay net payments on time or in advance

Personal loan

  • Have a credit card or loan that is reported to a consumer credit bureau.
  • Make payments on time
  • Use only a small portion of the available credit on revolving accounts

Business and personal credit ratings try to predict the likelihood that a borrower will miss a payment in the future. With this in mind, it makes sense that it is important to have a history of timely payments.

With a good understanding of why business and personal loans can be important to small business owners, you can continue your research online. If you want to know more about personal loanThe myFICO.com consumer credit resources can help.

About myFICO
myFICO makes it easy to understand your FICO loan® Invoices, credit reports and alerts from all 3 bureaus. myFICO is the consumer arm of FICO – get your FICO points from the people who make up the FICO points. For more information visit https://www.myfico.com

SOURCE myFICO

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