Why Personal Credit Matters More Than Many Business Owners Realize

Business owners focus on many aspects daily, such as monitoring and controlling the top and bottom lines and forecasting growth. Many owners pay little attention to their personal credit, which can affect their ability to obtain business funding and, in turn, their top and bottom lines and business growth.

Just because a business and its owner are separate legal entities doesn’t mean the owner’s credit will never come into play when applying for a business loan. A business with little financial history can often have its owner’s personal credit checked to assess lending risk. To support both your personal finances and your business, make sure you maintain good credit!

The Connection Between Personal and Business Finances

For new companies and small businesses with an established credit history, the connection between personal and business finances matters most. Companies with an established credit history can qualify for business financing based on revenue, assets, and payment history. However, businesses with little or no credit history may have lenders review the owner’s personal credit or require a personal guarantee to approve financing.

Lenders may also review the owner’s credit history when the business cannot verify a credit history and/or when the owner is asked to provide a personal guarantee to lend to the business. So what affects the owner’s credit? Past payments, credit limits, new credit inquiries, etc. By maintaining healthy personal credit and managing financial obligations well, a business owner can reach business goals, maintain good personal credit, and keep business finances healthy.

As a sole proprietor, you may find that your personal and business finances are even more intertwined. Although you should keep separate accounts and accurate records for personal and business transactions, the lender may use your personal credit history to decide whether to grant business credit or even ask for a personal guarantee on a business loan.

How Personal Credit Can Affect Business Financing

Personal credit affects how a business owner will qualify for business loans, lines of credit, and commercial credit cards. The owner’s credit also determines the interest rate, the amount of credit granted, and the terms and conditions for repaying the debt. Good personal credit can give you more options for business loans and credit programs. The type of loan or amount of credit you need, for example, to buy new equipment, to stock up on more inventory, or to finance the costs of growth, will determine the types of choices available to you.

Once you know where you stand with your personal credit, you can better evaluate business financing opportunities. You can determine whether the financing terms are reasonable for you.

Use Free Credit Monitoring Services to Stay Informed

Keeping an eye on your credit does not have to add another complicated task to running a business. Free credit monitoring services can help you follow changes to your personal credit report, while some providers also give you access to business credit scores at no cost. These tools can make it easier to stay informed about your credit standing as your business grows.

As your credit score changes, you will know whether it’s improving or declining. This matters when you’re seeking future business financing, negotiating a commercial lease, or trying to get the best terms on a business vehicle purchase.

Tracking your credit score is especially important if you’re preparing your business for growth. Even if you’re not actively looking for financing right now, it’s always good to know what a lender would see if you applied for a loan.

Personal Credit and Everyday Business Decisions

Personal credit history can even impact equipment financing, leasing, and bidding on commercial real estate and vehicles. In some cases, even suppliers require a personal guarantee when extending credit to a newer business. A guarantee can negatively affect an owner’s personal credit score and their personal cash flow.

These obligations can significantly affect a business owner’s cash flow and the amount of working capital available for other aspects of the company, such as marketing, inventory, and payroll. Additionally, the terms of an obligation can be very favorable, or not so much, which will also affect the business owner’s cash flow.

As you negotiate and review business agreements and offers, knowing your personal credit can help you decide whether the terms are good enough. You can continue to monitor your credit score to help you prepare for future negotiations.

Building Credit Through Consistent Financial Habits

When building good credit, it helps to understand that it typically takes time to develop. Good credit is typically built by paying on time, keeping revolving utilization low, and avoiding unnecessary credit inquiries.

By keeping personal and business finances separate, business owners can manage their finances more easily by tracking all financial activity in separate accounts. Keeping financial activity clear and separate can help the business build a separate credit profile for alternative financing.

Changes to your credit profile take time to develop, so regular monitoring will help you see whether your good credit behavior is having the desired effect.

Preparing Personal Credit for Business Growth

Before you know it, opportunities to grow your business are right in front of you. It could be an opportunity to open another location, buy products at lower cost and sell them for higher returns, or sign a large contract that needs more staff to fulfill. You need timely access to capital to take advantage of these opportunities.

Entrepreneurs who want to grow their business should also understand their personal credit rating so they know what options are available when unexpected opportunities arise. Often, these circumstances arrive unexpectedly, like an offer to open a second store, supply lots of stock at low prices, or suddenly employ lots of people after a huge contract offer.

Checking your credit while you’re improving it lets you see how much it has improved before applying for finance, which helps you get the best possible terms for your business.

Conclusion

Business owners’ personal credit can affect many aspects of their strategy. In the early stages of a business’ life, it can significantly influence the interest rate charged on financing, the terms of commercial agreements, and the range of products available.

Business owners who manage their personal finances responsibly and monitor their credit report frequently will be better prepared to handle the financial issues that arise as their business grows. Using personal credit information as part of overall business financial planning can help business owners of all sizes stay more flexible in handling opportunities as they arise.