Can Your Credit Record Impact Your Business Loan?
It is said that it’s always better to keep your work and your personal life separate. By that logic, your personal credit history shouldn’t really affect your business loan application. However, often, that isn’t the case.
You see, when you are a small business owner, those lines between work and personal life often tend to get blurry, no matter how hard you try. Also, there are many times when this lack of distinction causes trouble, and your personal credit history becomes very important to a lender for a quick Business Loans. Read on to know more.
How Your Personal Credit History Affects Your Business Loan Application
Here are a few situations in which your personal credit history is considered for your business loan application:
1. When You Are The Business
If you own a sole proprietorship business, you become the business. In such a situation, your business credit and your personal credit cannot remain separate.
If you apply for a loan for your business, your personal credit history will naturally be considered before the approval of the loan.
If you have a poor credit score, unpaid loans, a high debt to income ratio, or have been a defaulter in the past, your chances of getting even a small business loan are very low.
2. When You’ve Got No Credit History
Even if you own a private limited company or an LLP, if you have no credit history before you apply for a small business loan, the lender you apply to will consider your personal credit history. This is to form some sort of assessment as to whether you will be able to pay your loan back.
Depending on when you need the loan, you can delay the application, and use the time to establish credit, by getting a credit card or becoming an authorized user on someone else’s account.
Wait at least six months and be sure to repay loans on time, keep your credit utilization to less than 30%, and keep your old accounts open, to get and maintain a good credit score.
Factors In Your Credit Record That Affects The Business Loan Approval
So, those were the two situations in which a lender/ bank would ask for your personal credit record. The following are the factors that impact whether you will get a business loan:
1. Debt To Income (DTI) Ratio
The DTI ratio is defined as the percentage of your income that is spent servicing debt. Ideally, this should be around (or less than) 35%. And while a DTI between 35% and 50% is average, anything more than 50% is bad.
Thus, if you have a DTI of more than 50%, you are unlikely to get that loan, as the lenders will feel that your income is not enough to bear the pressures of a business loan.
2. Delayed Or Missed Payments
Even after the last date to pay your EMI, you will be given a few extra days to make the payment. If you pay during that time, the payment is considered late, and if you forget to pay entirely, the payment will be considered missed.
Consistent late and/or missed payments drastically reduce your chance of availing a business loan.
3. Bankruptcy
If you have ever declared bankruptcy, your chances of getting a loan are reduced to almost zero, even if you had filed for it years ago. Filing for bankruptcy once will haunt you by reflecting in your credit record for minimum 10 years, thereby making it difficult to avail a quick business loan.
So, once you’ve taken care of your personal credit history, make sure to know the interest rates of business loan before making an application.
Additionally, unlike with banks, you can approach NBFCs like Bajaj Finserv for a quick business loan, even if you have an average or low credit score/history.
Though the NBFCs too will consider these factors before approval, they are much more flexible and have faster approval periods of just 48 hours. Moreover, they offer high loan amounts of up to Rs. 30 lakh at very competitive interest rates.
Be sure to check business loan eligibility through, before you apply online!
Category: Business, Credit, Credit Score
