Can your business loan affect your personal credit score?

One of the most important eligibility criteria while applying for a personal or a business loan is a credit score. Thus has been told, heard and written over a large period of time. Your credit score defines your creditworthiness – meaning if you can repay any loan or credit that you have availed. In this situation the first question which comes in your mind is “will a business loan affect my personal credit”. You can find the answer here. 

There are two types of credit scores – one for loans taken as individuals known as Credit Score and one for loans taken for businesses known as Company Credit Report. In the case of personal credit score, a credit bureau counts loans taken by individuals in their individual capacity to determine the credit score. In the case of company credit report, a credit bureau counts loans taken by a business to write the company credit report.

In the normal course of businesses, individual loans and business loans are separate. However, based on the ownership structure and the terms and conditions of business loans individual loans and business loans can acquire interchangeable character.

However, an individual loan and a business loan can relate to each other and this relationship can affect personal credit score and the company credit report as well.

Relationship matters

In India, there are several types of ownership possible which include proprietorship, partnership, LLC, private limited company, public limited company and others such as trusts. Thus, ownership pattern of a business impinges on the credit score of the business.

For instance, if you own a business as a proprietor of the business, then the individual personal credit score gets affected by the business credit report. The reason is that the individual and the business use the same PAN card while availing loans whether for business or for personal reasons separate from the business.

Thus, lenders report all loans taken under the same PAN card to the credit bureau, which ultimately results in impacting the personal credit score and the company credit report whenever there is a transaction recorded for each.

The same is true for partnership firms and LLC. Even here, while there is a separate identity for the partnership firm or LLC including a separate PAN card for the firm, the individuals in the firm would have to submit their PAN details, thus making it easy for credit bureaus to tag the personal credit scores of the partners.

In the normal course, if you are a shareholder or a promoter in a business incorporated under company law, your business loans may not impact your personal credit score. 

Individual asset offered as collateral security

Typically, in businesses run by non-proprietary ownership structure, businesses do not possess sufficient assets in the name of the business which can serve as collateral while availing business loans. In such cases, lenders demand the personal assets of owners as collateral. In doing so, the owner submits the required documentation to the lender to secure the asset. 

In such cases, the lender submits the information to the credit bureau thus tagging the asset and the owner in both the personal credit score and the company credit report. There is thus a close relationship between the two and one impacts on the other and vice versa.

Individual as guarantor

Lenders extend unsecured loans on the basis of parameters that include creditworthiness of the applicant, credit score, company credit report, earning potential, future of the business and so on. In the absence of certain assets as collateral, they insist on guarantors who can vouch for the creditworthiness of the applicant. In doing so, guarantors become liable to repay the loan in the event the borrower fails to repay.

As a part of due diligence, individual guarantors submit their individual details to the lender. The lender submits this information too to the credit bureau while reporting the transactions. If you have stood as guarantor for many firms, it is very possible that would count against you affecting your credit score negatively.

You must remember that you can have a credit history only when you take a loan. When you take a loan, you have to repay the loan. The lenders submit information to the credit bureau that includes

Therefore, when you take a loan for business, you will do well to ensure you have a squeaky clean personal credit score to enable you to get a higher loan amount at attractive terms including lower interest rates. The moral of the loan saga is that prompt repayment of loans will fetch you better and affordable business loans in the future.