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Will a business loan affect my personal credit?

Business Loans & Funding

Will a business loan affect my personal credit?

Updated: 5 September 2023

Business loans can be an essential tool for entrepreneurs looking to grow their businesses. However, it’s essential to understand the potential impact a business loan can have on your personal credit.

While it’s true that business loans are intended to finance business needs, personal credit can play a role in the loan approval process and can impact a business owner’s ability to secure financing now and in the future.

So, does a business loan affect personal credit? To look into this question, here’s all you need to know about how business loans can impact personal credit.

The impact of a business loan on personal credit

One of the most significant factors that can impact personal credit when it comes to business loans is whether the loan requires a personal guarantee. A personal guarantee is a legally binding agreement making the director(s) personally liable for the loan if the business cannot repay it. Asking for a personal guarantee means the lender can say yes to more businesses.

If a business loan requires a personal guarantee, a record of the loan may also show up on the business owner’s personal credit report. For limited companies who apply at Funding Circle, this “hard search” only appears if you accept your loan, so you can apply and review any offer with no impact to your credit score. 

The role of personal credit in business loan approval

Another way that business loans can impact personal credit is through the loan approval process itself. When a business applies for a loan, lenders will typically evaluate both the business’s creditworthiness and the personal credit of the directors providing the personal guarantee.

If the business owner has a poor personal credit score, it may be more difficult to secure a loan, or the loan may come with higher interest rates or less favourable terms. If they have a history of responsible borrowing and repayment, however, then they are more likely to be approved.

How to protect personal credit when taking out a business loan

If you’re considering taking out a business loan, there are a few steps you can take to protect your personal credit:

Shop around for the best loan terms

The better the loan terms, the less likely you are to fall behind on payments and potentially damage your personal credit, so consider your options before committing to a loan. At Funding Circle, our team can help you understand what’s available in the market, as well as finding other products available from our partners without you having to submit multiple applications. 

Make payments on time

This goes without saying, but making payments on time is essential to protecting both your business credit and personal credit. If you get into difficulty or are concerned about missing a repayment, let your provider know as soon as possible, as they may be able to help or connect you with advisors. 

Monitor your credit reports

Keep an eye on both your business credit report and personal credit report to ensure that there are no errors or fraudulent activity. You can set up reports with credit bureaus with email alerts on new activity, and it’s always good to check your report before making credit applications. 

Know whether the loan requires a personal guarantee

Before applying for a loan, ensure you understand whether the loan requires a personal guarantee. If it does, make sure you understand how personal guarantees work, and speak to your provider if you have questions. 

How Funding Circle can help

At Funding Circle, our loans are funded by a range of organisations who lend through our platform. To give them greater protection for the money they lend, we ask for a personal guarantee from company shareholders on all our business loans. You can find out more about how we use personal guarantees in this article

If you’re a limited company or LLP, you can apply for a business loan or a FlexiPay line of credit with no impact on your credit score, so you can assess your options with complete peace of mind. We will only run a hard search if you go on to take out either product. 

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