Is Personal Credit Important When Applying For Business Loans?

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Quite often I am asked why the personal credit of the business owner is such an important factor in determining whether a company will qualify for a business loan. Due to the fact that my experience is with almost exclusively with start-up and young companies, perhaps I can shed some light on this particular topic.

The answer to this question comes down to one simple word: Character. In this day and age loans and credit are no longer granted based on relationships, rather on a statistical scoring model. At its core, this rating is a numerical representation of character as it relates to the management of credit. Because start-ups and young businesses have no, or very little, track records the banks must base their determination of the company’s creditworthiness on the individual who will be managing the business’s finances. For small businesses, this is always the business owners.

The bank is to going to conclude that the same character demonstrated in the business owner’s personal affairs will be the same as the habits they demonstrate with their business affairs. So an owner with good credit will be get the benefit of the doubt and will be calculated as a good business risk by a lender who would otherwise be on the fence.

The point here is to illustrate that once a company exhibits its own credit character it becomes even MORE important than personal credit. Banks are much more willing to lend to a business with a track record and good credit rating because unlike an individual, a business, fundamentally, is created and exists to create value and turn a profit.

This is precisely why a good loan specialist will work both sides of coin. By using the good personal credit of a business owner to access business capital they can begin to establish the business credit which will ultimately be more attractive to a bank. The business loans I’m speaking of are not guaranteed and the individual has not collateralized them in any way. A bank will always prefer to lend to a business with some recourse for them. So the point for an owner is create opportunities for better financing options in the future and they way to get a head start is by having good personal credit.

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Topics: Loans | Comments Off

Tags: banking, Business, business finance, business loans, Finance, Loans, money

Article Citation
MLA Style Citation:
Walsh, Renae "Is Personal Credit Important When Applying For Business Loans?." Is Personal Credit Important When Applying For Business Loans?. 28 Dec. 2010. uberarticles.com. 16 Apr 2012 <http://uberarticles.com/finance/loans/is-personal-credit-important-when-applying-for-business-loans/>.

APA Style Citation:
Walsh, R (2010, December 28). Is Personal Credit Important When Applying For Business Loans?. Retrieved April 16, 2012, from http://uberarticles.com/finance/loans/is-personal-credit-important-when-applying-for-business-loans/

Chicago Style Citation:
Walsh, Renae "Is Personal Credit Important When Applying For Business Loans?" uberarticles.com. http://uberarticles.com/finance/loans/is-personal-credit-important-when-applying-for-business-loans/

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