Why Does My Personal Credit Score Matter to a Small-Business Lender?

Although your personal credit score, or FICO score, probably isn't the best indicator of your business's creditworthiness, it will likely be part of every creditworthiness evaluation for most small businesses. Different lenders may assign different weights to the value of your score within a business loan application, but depending on the lender, either way, your score could will play a big role in whether or not you get approved for a loan, what interest rate you might pay, or the type of business financing that’s available to you.

This is probably the most difficult question for a potential lender to answer. The lender wants to confirm that regardless of what happens in the future, you will still be able to meet your payment obligations. If not, they want to mitigate their risk and recoup as much of the value of the loan as possible. That’s why traditional lenders, like banks or credit unions, will often require a detailed business plan that not only shows where your business is today but also makes data-based assumptions about where it’s going and how you expect it to perform in the future.

It’s also why some form of collateral is usually required. Sometimes the collateral could be a specific asset, like a piece of equipment or real estate. But it could also be a general lien that doesn’t identify specific collateral but rather identifies all the business’s assets generally to secure the loan.

Ultimately, whether a traditional lender or an alternative lender is better for you and your business depends on your unique situation.

As you might expect, traditional lenders have a higher minimum threshold and are more likely to treat personal credit scores as a go-no-go metric. In other words, if your personal credit score falls below a certain threshold, they likely won’t even consider your loan application (this includes loans guaranteed by the SBA).

Many online lenders will approve an application for a small-business loan that might not gain approval at the local bank—provided other business metrics successfully answer the three questions above. But although there are a number of financing options for small-business borrowers with a less-than-perfect personal credit score, those options will likely include higher interest rates.

As a business owner, your personal credit score is one of several creditworthiness metrics a potential lender will use to determine whether or not it will approve your small-business loan. In addition to metrics like your annual revenue, cash flow, time in business, business credit profile, and business track record, most creditworthiness discussions will include the business owner’s credit profile regardless of the lender.

Although a strong personal credit profile won’t necessarily guarantee the lowest interest rate, it will open the doors to many opportunities a poor score won’t. And depending on the lender, it will improve your odds for success.

Check out these seven things you can do to build business credit.

As a business owner, your personal credit score is one of several creditworthiness metrics a potential lender will use to determine whether or not it will approve your small-business loan. In addition to metrics like your annual revenue, cash flow, time in business, business credit profile, and business track record, most creditworthiness discussions will include the business owner’s credit profile regardless of the lender.

Although a strong personal credit profile won’t necessarily guarantee the lowest interest rate, it will open the doors to many opportunities a poor score won’t. And depending on the lender, it will improve your odds for success.

Check out these seven things you can do to build business credit.

What is a FICO Score?

Can Personal Loans Build Credit?

5 Ways to Build Business Credit

What is the Average Business Loan Interest Rate?

Small Business Loan Terms You Need to Know

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