How Your Personal Credit Score Affects Small Business Lending

Alternative solutions for getting a loan or line of credit

bank-loans

Unlike the CEOs of major public companies, whose personal financial situation has little effect on their companies’ borrowing, if you are a small business owner, your personal credit is a major factor influencing your company’s access to capital. According to Small Business Trends, the power of personal credit scores to predict small business loan repayment, the legal structure of many small businesses, and small business owners’ use of personal guarantees and personal borrowing to finance business operations, all link small business owners’ personal credit to their companies’ access to capital.

Many, if not most, lenders will look at your personal credit score if you are a small business owner seeking a loan for your company. A 2006 report written for the U.S. Small Business Administration found that 71% of banks used small business owner credit scores when underwriting small business loans. The personal credit record of the business owners is considered a good predictor of the repayment of business loans of less than $100,000.

The legal structure of small businesses also links personal credit to business access to capital. Approximately 72 of U.S. businesses are sole proprietorships, Internal Revenue Service data indicate. Because the debts of sole proprietorships are not legally distinct from those of their owners, lenders and trade creditors pay careful attention to the personal creditworthiness of sole proprietors, reports Small Business Trends. Studies show that many small business owners borrow personally to finance their business operations, further intertwining small business borrowing and owner personal credit.

So what can a business owner do if bad credit is preventing them from getting a business loan?

The good news according the SBA is that there are alternative funding programs and solutions providing business owners the opportunity to obtain a business loan or line of credit regardless of having bad personal credit. Instead, other factors are taken into consideration such as bank deposit history, credit card sales, credit partners, and other data sources.

Bank deposits – A business with regular bank deposits can put its cash flow to work with revenue-based loans. This program is based on the deposits going into the business bank account on a monthly basis. Typically, a business can obtain a business loan equal to 10% of its annual gross deposits regardless of having bad credit. Another benefit of this program is the time it takes to get funded, which is approximately seven business days. Keep in mind the loan term can be as long as 18 months with this program, with rates slightly higher than a traditional bank rate. It requires no collateral, financials or tax returns. Repayments are made in small increments every day via ACH from the business bank account.

Credit card sales – This type of funding program, known as a merchant cash advance, provides businesses with upfront cash in exchange for a portion of future credit card sales. For businesses that have regular monthly credit card sales but struggle with bad personal credit, a merchant cash advance may be a viable option. However, be very selective on what merchant cash advance provider you select. Some providers can cost as high as 38% while others can be as low as 12%. In addition, when it comes to repayment, the majority of merchant cash providers take a fixed percentage of your daily credit card receipt volume until the advance you took is paid back. Other business cash advance providers may offer a fixed monthly installment payment for its repayment method.

Credit Partner – Using a business partner(s) as a credit partner for obtaining lines of credit in the form of business credit cards can be a viable solution to overcome a personal credit challenge. A business partner who has strong credit scores is the best place to look. You may also want to consider someone who may be interested in participating in your business as a potential credit partner. This method does bring risk to the credit partner because they are cosigning with the business to obtain funding. However, these types of unsecured business credit cards will not appear on the personal credit reports of the cosigner unless they go into default.

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