Is my personal credit score important when applying for a business loan?
While large corporations can guarantee a loan themselves (due to assets and cash flow), small businesses are often required to provide a personal guarantor (PG) when applying for a loan. A PG is a person who guarantees that the loan will be paid back. And even though you may have created a LLC (which is a separate entity) the lender will often seek a way to reduce their risk, and that is where a PG comes in.
A partner, a sole proprietor or even someone with ties to the business, such as a landlord, can be a PG. Obviously, it needs to be someone that the lender feels can and will cover the debt if needed. In case it is not clear by now, this is why your credit score matters.
Credit score calculations have multiple components such as credit utilization, history of loan payments, and how often lenders look at your score. Your credit history helps tell the lender if you are the kind of person that can be trusted to pay debts. But, it could possibly tell them more than that.
A lender wants to know if you have a stable financial situation. If you do not, then you might be driven to make bad business decisions just to make a quick buck, and that can be a hindrance to business success. The lender is very interested in your business success so that you can repay the loan.
Of course, sometimes events occur that create a negative impact on your credit report through no fault of your own. Fortunately, some lenders are very open to hearing your explanation of what happened. This helps them understand what caused the problem, but more importantly, how you handled it. The truth is, most of us do not know how to handle tough financial problems very well.
If you have negatives on your credit report that may keep you from securing a loan, you can improve your score significantly through a combination of a financial based strategy with a disciplined approach. Many of our clients have struggled with this and sought help. Unfortunately, there are some credit businesses that are just not very good and take money without performing well. That is why we recently partnered with a reputable credit score enhancing company to share with our clients.
So, even though you may have a good business set up as a LLC or corporation, if you are considered a small business, you will likely be required to sign on as a Personal Guarantor for any loan. If your credit score is not strong, you may have to pay a high interest rate, or worse, be declined all together.
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