Can Business Loan Affect Personal Credit?

Introduction

If you are worried that your credit score will affect your business loan, this is all you need to know!

Personal finance and its implications on your business can be tricky to deal with. If you already own a small business or are thinking of starting one, it can be confusing to figure out the intricacies of how banks function when it comes to your finances.

It is essential to keep a keen eye our how one step can affect other parts of your bank statements. This is true for your credit, without which getting a loan becomes harder.

If you’re a person who’s looking to take out a business loan, here’s a simple guide to how it works and how it might affect your credit.

Index:

1. How does a business loan work
2. How does a CIBIL score work
3. How does a business loan affect personal credits
4. How to keep business and personal finance separate

How Does A Business Loan Work

With all loans, there are terms and conditions that borrowers (business owners, regular people, companies) agree to before they receive the funds. The lenders (primarily banks) set a specific period and interest rate for the money to be paid back.

A business loan is used to make business-related payments or pay business expenses. These expenses can be used to pay employees, renovate buildings, expand products and services, and many more. There are multiple types of business loans you can take. Secured and unsecured loans are two types of loans concerning what you offer the lender in return. 

A fast loan expects collateral from the borrower, which is usually an asset that can be used if the payment is not paid in the time given by the lender. Unsecured loans do not need collateral, which means the interest rate is usually higher in these loans.

The businesses registered under the Companies Act 2013 can get business loans quickly. If such a business loan turns bad, it will impact the CIBIL Company Credit Report of such business but will not affect the business owner’s credit.

However, in the case of a sole proprietorship, if the business loan turns bad, it will adversely affect the personal credit score of the business owner.

How Does Credit Score Work

A credit score is a number that banks and other lenders look closely at to determine if it’s worth it to give you a loan or not. The score is usually between 300 and 850. It reflects on the borrower’s potential to get a loan. The higher the number, the more likely a lender will lend you the money.

Numerous factors determine this credit score. However, the most common factors are the number of open accounts, total levels of debt, and repayment history.

You can have a CIBIL score, and it is essential to maintain a high CIBIL score to access financial institutions’ loan facilities. A good CIBIL score makes the loan process smoother and more accessible. 

Here is a general guideline of how good or bad your CIBIL score is:

• Excellent: 800–850
• Very Good: 740–799
• Good: 670–739
• Fair: 580–669
• Poor: 300–579

How Does Business Loan Affect Personal Credit

The answer to this central question is: yes, in some situations. Depending on the lender, and the type of loan you require, the owner’s credit may or may not take a hit.  However, the effect on personal credit does not have to be wrong. You can maintain good personal credit and even boost it by doing so.

You must use your business accounts or loans if you do not want to use funds from your personal loans. You can use business lines of credit (a credit card for business purchases), ensuring that the report reflects your business credit. Using personal credit would affect your CIBIL score adversely.

How To Keep Business and Personal Finances Separate

The first step is to choose an appropriate entity structure to keep your business finances separate. That is, what kind of business is yours? Three entities allow for individual business finances: Limited, private limited and one-person companies, partnership and limited partnership and sole proprietorship firms.

However, these entities may cause different kinds of trouble with financing. To ensure that you keep the finances separate, the best solution is to open a different bank account for your business.

You can take out a business credit card for your business expenses, adding to your business credit scores and hopefully enabling smoother sailing in the finances section.

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