How Personal Credit Affects a Business Loan


It’s not uncommon for small business owners and entrepreneurs to tap into personal credit to keep their companies going, but when it’s time to ask for a business loan you need to know how they’re tied together.

“Absolutely will a bank look at your personal credit history if you’re applying for a business loan,” says accountant and lawyer Shannon Nash, president of Nash Management Group in Atlanta and Los Angeles. “They’re trying to figure out what’s risky and what’s not risky and determine if anyone will default on a loan.”

Entrepreneurs should be acutely aware of how their personal financial decisions could affect their business. Ylisa Sanford Seymour, a senior financial adviser with Ameriprise Financial who has offices in San Francisco and Santa Rosa, Calif., recalls a business owner who was considering defaulting on a real estate loan because of the tough economic times. His banker told his client that if he walked away from that property, the bank would pull his business line of credit.

New business owners may not have much of a business credit line to show to a bank and need to make sure that their personal credit is strong. Any bank will run a credit report on an applicant so it’s important to review your report even before you apply for a loan, says Nash.

Your Credit Score on Steroids
A credit score of 700 is OK, but not even considered “good” these days, says Nash, adding “if your credit score falls in low 600s it will be very hard to get a loan.”

Sanford Seymour says it’s not uncommon for banks to require scores above 800 in order to get a loan.

“Get the report and work on cleaning it,” says Nash. “Don’t sugar coat the situation. Tell the bank here’s the problem and I fixed it. “A business needs to show that receivables are coming in, you have a great concept and what dragged down your score was something in the past that you’ve changed.”

One of the biggest red flags on a credit report is a customer who pays utilities late, says Sanford Seymour. “They are such basic necessities and it will immediately drag down your report if you don’t keep current on all payments.”

She also urges business owners to have already vetted the financials and credit history of a business partner so that there are no surprises for you or the bank.

Nash believes a business owner who works hard can fix up a credit score in less than six months.

A more established business likely already has a strong relationship with a bank but if it’s a new loan don’t think you’re automatically going to get it,” Nash cautions.

Big Banks vs. Little Banks
Sanford Seymour says that a larger bank may “absolutely accept or deny” a business loan based on a credit score.

But a local bank might reflect on more than the credit score, she says. “Local branches often give a more personalized evaluation.”

A bank will look at your cash flow and if you don’t have business credit, they will also look at collateral. A local bank may respect your personal guarantee if you don’t have much collateral, “but you don’t see much of that these days as you would in years past,” says Sanford Seymour.

Don’t discount a larger bank though. A large, national bank might be the right choice for a loan when you have a high credit score or an established relationship with them.

“With a large bank, you could have that loan in 30 or 90 seconds with a check book ready to go,” says Sanford Seymour. “It’s a lot faster and easier to work with and within an hour you can have all sorts of new accounts and a new network of resources.”

She advises that business owners run a profit and loss report for a bank, show the cash flow for the business, offer testimonials from customers and invite the banker to come down and see your restaurant, bakery or other business.

“Try to get them to believe in you and invest in your business,” she says.

Nash notes that there are banks out there that loan to people with bad credit, “but the cost of money is high and you’ve got to have a business where the lenders can get out and touch the business equipment.”

She also advises against the popular entrepreneurial financing method of trying to run a business via four or five credit cards: “That’s expensive money and if you’re not able to pay those down, that can come back to haunt you,” she says.

The Federal Trade Commission offers a tip sheet for helping consumers get out of debt.

Both Nash and Sanford Seymour are seeing more commercial loans these days backed by a customer’s collateral.

Nash has a client who instead of getting a $50,000 loan for operations was able to get $20,000 from private investors and another $30,000 for an equipment loan. “That’s something you didn’t see four to five years ago,” she says.

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