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Is Personal Credit Score Impor...Yes, personal credit scores can have a significant impact on your business in several ways. It is particularly important for sole proprietors and limited partnerships with a few owners only.
It’s particularly challenging for small businesses to separate personal and business credit scores. However, large business owners also require personal credit scores in different ways for business financing and other aspects.
Is Personal Credit Score Important for Your Business?
Your personal credit score is the summary of your personal financials. It is not public information and lenders will usually conduct a soft or hard inquiry to check it.
On the other hand, business credit scores are publicly available and represent the financial strength of a business. Both types of credit scores are important for all businesses.
Personal Credit Score for Sole Proprietors
Most small business owners register business entities as sole proprietors with unlimited liability. Therefore, the personal credit score of the owner becomes effectively the financial credibility of the business.
Therefore, most lenders will look into the personal credit score of a small business owner for any business loan application or refinancing.
So, even when you develop a good business score, your personal score will remain a key determinant for lenders.
Personal Credit Score for Corporations
Corporations are separate legal entities from business owners and shareholders. Therefore, lenders will evaluate the financial strength of a corporation more than the personal credit scores.
However, shareholders/owners may use personal assets as a pledge for debt financing. Lenders will eventually evaluate personal credit scores in these situations then.
What is the Importance of My Personal Credit Score for My Business?
Your personal credit score can impact your business in different ways.
Access to Debt Financing
Lenders require an established credit history and would want to assess your personal finance management skills.
It means your personal credit score is directly relatable to accessing debt financing for your business. Lenders will hardly consider a loan application without a personal credit score from sole proprietors and limited partnership owners.
Impact on Borrowing Limits
Lenders put different types of restrictions on borrowers including the maximum loan amounts with particular credit score ranges.
Therefore, if you want to access debt financing for a significant loan amount, you’ll need an excellent personal credit score. Particularly, your existing debt amount and debt utilization ratios will be important for lenders.
Impact on Borrowing Costs
Interest rates and credit scores are directly related. If you have an excellent credit score, you’ll likely get a lower interest rate for similar loans with bad credit scores.
Therefore, if you want to reduce borrowing costs, developing personal credit scores is a necessary step.
Supplier Relationships
Negotiating favorable terms and prices with suppliers is significant for any business. Suppliers will also look into your personal and business credit scores.
Particularly, when your business is in its early stages, suppliers will want a good credit score from your side. It can help you negotiate better prices and extended payment terms without incurring additional interest costs.
How Bad Credit Score Can Negatively Affect My Business?
A personal credit score is particularly important for a business in its early stages. Without an established business history, there will be no business credit score.
Hence, a business owner will inevitably rely on a personal credit score. In other situations, a business may own a bad credit rating affecting its business operations adversely.