Does Personal Credit Matter When You Apply for a Small Business Loan?
Small Business Loans have a plethora of checklists before approving any loan. Loans also involve income statements, income proof, balance sheets, cash flow statements, previous year income etc. Additionally, many banks refer to the credit score of their business owner client to assess if they are a good candidate for loan.
However, one of the criteria for a bank to judge if the client is a credible loan applicant is their personal credit score. This is one of the most crucial things business owners forget about while applying for a business loan. To make things easier to understand, let us navigate through personal credit and its implications on loan applications.
What is a Personal Credit Score?
Our personal credit score is a score based on how trustworthy we are as loan borrowers based on our past history. So if you pay your student loans, house loans and personal loans on time and ensure that you do not max out on your credit cards, chances are you have a good credit score. You can take the help of your accountant to improve your credit score before applying for a business loan.
Why is Personal Credit Score Important for Lenders?
A credit score is a simple way to do a background check and determine if the borrower has good financial habits. Many people have the tendency to bite more than they can chew with regard to business-related projects and, therefore, fail to repay the loans. They want to know that you have considered the ins and outs of your business before applying.
Also, a business credit score remains with the business. If the business is sold to another individual tomorrow, the credit score will also transfer to that person. As a result, it becomes critical to know if the person undertaking the business responsibilities currently is capable of paying back the loan and has enough credibility.
Another crucial reason why a personal credit score is important is - if the business is new, it does not have a credit score, to begin with. And loan lenders need assurance that they are investing in the right company with the right people.
How Can A Poor Credit Score Affect Your Business Loan?
A poor credit score makes it difficult for banks and lenders to build trust in the company. They tend to ask for more income proofs to back your profit and loss statements. And in most cases, the loan is declined. Therefore, if you have a low credit score, work on improving that before applying for a commercial loan.
Steps to be Taken
The first step to take is to analyse your credit history to understand where you faltered in the past, which led to low credibility. Then from that point on, do not apply for too many different loans at once. Also, do not max out your credit cards and pay your EMIs on time. Find an experienced accountant to help you navigate through the situation. Improve your credit score with the help of professional expertise.
Consider M.A.S. for Your Small Business Accounting Needs
Your small business accountant can help you in many ways other than auditing and bookkeeping, such as improving your personal credit score. If you want excellent small business accountants in Sydney, contact us by clicking here.