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How Does Your Personal Credit Score Affect An Unsecured Business Loan?

Young woman holding a phone and credit card

Whether you’re starting a business, purchasing new equipment or covering gaps in cash flow, a Kiwi business often needs a capital injection through an unsecured business loan. But when you aren’t putting up security, a lender will look at your personal credit score as well as your business financials – and a poor credit score could negatively impact on your ability to get a loan.

Here’s what you need to know:

 

Read more: Can you get an unsecured business loan while you’re self-employed?

 

What are lenders looking at?

If you are applying for an unsecured business loan, a lender will look at the credit scores of the directors of the company and, if available, the commercial credit worthiness of the business itself. Both impact on your ability to get a loan, and a poor history in either of these cases might stop you from getting the loan you want.

However, a poor personal credit score doesn’t always stop you from getting an unsecured business loan. It may simply adjust the conditions of the loan, particularly in terms of interest rates.

 

Why do lenders care about my personal credit score when I’m applying for an unsecured business loan?

When someone applies for an unsecured business loan, they will be expected to sign a personal guarantee. This guarantee means that should the business default on their payments, the guarantor (the person who signed the guarantee) will need to pay it in its stead.

This means that the personal finances and the commercial finances are intertwined. If the commercial side runs into trouble, the lender needs to know that the guarantor can make the payments, so they check the borrowing and repayment behaviour of both. Hence the personal credit check.

If personal credit scores weren’t checked, then the lender wouldn’t be able to figure out the risks of lending and would probably be a lot more careful about who and what they financed!

This is why it’s standard for any lender to consider both the credit worthiness of the individual applicant and their business – it’s rare not to check both.

 

I have bad credit, can I get an unsecured business loan?

While some lenders, particularly banks, have strict rules around personal credit standards, other lenders will be more flexible.

Rather than rejecting the application out of hand, these lenders will instead see poor personal credit as a reason to investigate further as to the reasons for the bad credit. It is less about the score itself and more about the reasons for that score.

A bad personal credit may reduce the amount you can borrow or increase the interest rate being charged – or make no difference at all. It is not an instant kill-switch on the loan approval process.

 

How can I improve my personal credit score?

If your personal credit score does impact your business loan application negatively, there are some ways to fix the damage. This includes but isn’t limited to:

  • Repaying defaults
  • Building up a history of regular repayments
  • Fixing errors on your credit file
  • Avoiding taking out more debt
  • Avoiding making lots of loan applications

Find out more about fixing your personal credit score.

 

Summary

  • Your personal credit score will impact your ability to get an unsecured loan.
  • But a poor personal credit score will not stop you from getting a loan by itself.
  • Lenders check your personal credit score to get a better picture of the lending risks.
  • Lenders have different standards for personal credit and business lending criteria, so shop around if you are rejected the first time. You do have options.
  • If your personal credit score is impacting your loan applications, there are ways to fix it.

If you want to know more about your business loan  options, or to apply for a flexible arrangement, get in touch with a GetCapital loan expert on 0508 438 227.