Do I Need a Good Credit Score to Get a Small-Business Credit Card or Loan?
by The Ascent Staff | Updated July 21, 2021 - First published on Sept. 16, 2019
Thinking of applying for a small-business credit product? Here's what to know about how your personal credit matters.
So you've started your own small business -- congratulations! Becoming an entrepreneur is a brave and exciting move, one that can help you build wealth while pursuing your passion. Unless you've saved up quite a start-up fund, you'll likely need some sort of credit product to help you get started. For most people, that generally involves opening a small-business credit card, applying for a small-business loan, or both.
Banks look at information like your business's income and credit history to assess your creditworthiness before granting a small-business credit card or loan. But do you need a good personal credit score? You might be surprised to learn that, unless you've been in business for a long time, banks might ask to see your individual credit report. That means your own credit score could be a factor in whether or not you get approved for a small-business credit card or loan.
Here's how your personal credit score may affect your odds of getting financing for your business.
Your legal structure matters
There are lots of different ways to legally designate your business, and some have implications for your personal finances. Particularly, if you are a sole proprietor or a single-member LLC, you likely pass your business income through your personal taxes. If this is the case, your personal credit score will be a key factor in any credit card or loan applications you submit.
Other legal structures require you to establish an Employer Identification Number (EIN), which will allow your business to start building its own credit profile (more on that below). The longer your business credit history, the more likely it is that you can apply for credit products without providing personal credit information. Even if you are a sole proprietor, you can establish an EIN and start building your business credit score.
The difference between personal and business credit
As noted above, your business can have its own credit score. The system works somewhat similarly to your personal credit score, although there is no industry standard for reporting a business credit score the way there is for personal credit. This means each business credit bureau reports your score a bit differently. Things like paying bills on time, your industry, and the kind of debt your business carries all factor into your business credit score. Just like your personal credit score, business credit takes time to build, and you'll want to start thinking about establishing a good business credit history early if you know you need to apply for a loan.
How important is your personal credit score?
If you've been in business long enough to have a good business credit score, you have a much better chance of getting a loan or a new credit card without needing to supply your Social Security Number for a personal credit check. But realistically, you'll probably need to open at least a small-business credit card to establish a good business credit history in the first place.
This means your personal credit score does affect your chances of getting approved. Generally, the best small-business credit cards require a score of 670 or higher. While you might be able to qualify for a card with a lower score, you'll likely pay a higher interest rate or earn fewer rewards.
When it comes to getting a small-business loan, banks have higher approval requirements. In general, banks consider small businesses a risky investment, which means they often ask for a personal guarantee -- and may even expect you to put up personal collateral such as your house or car. Start planning early to make sure both your business and personal finances are in good shape before you apply for a small-business loan.
Whether or not your business credit products are tied to your personal credit history, follow the same good credit practices with your small-business credit card or loan that you would with your personal credit products. Make payments every month on time, ideally in full, and avoid taking on more credit than you can afford. Understand your loan terms, such as the interest rate you'll pay, and stay away from predatory products with high interest rates or lots of fees, even if they offer an easy way to get fast credit.
Starting your own business can be exciting and fulfilling, but it's also a serious financial risk. Take some small steps to understand the link between business and personal credit so your business dreams don't conflict with your long-term financial goals.
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