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Do business loans affect personal credit?

Written By:
Myles Robinson - Expert Finance Advisor

Posted: Jan 4, 2023

Fact Checked By:
David Nicholson - Finance Editor

Do business loans affect personal credit? Here is how they can affect you

You are likely to seek to grow your business by taking out a business loan. However, the world of business is unpredictable and sometimes things don’t go according to plan.

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If your company has accumulated debt and is having difficulty paying it off, it could impact your personal credit score.

A personal guarantee is an agreement with lenders that you will be responsible for loan repayments if your company cannot afford them. While this won’t apply to every loan for business, it is worth knowing the details of how and when your business debt might be reflected on your credit report.


Who is responsible for my business debt?

Knowing who will ultimately be responsible for repayments when you apply for a business loan is important. There are generally three scenarios depending on the type of business you have:

1) Sole trader

The lender sees you and your company as one. The sole trader is responsible for the business debt. If you’re unable to repay the debt, creditors may look at your assets and personal savings accounts. After that, through your business being insolvent, you might have to file an individual voluntary arrangement.

An IVA allows you to pay off your loans through periodic payments to an insolvency practitioner who then divides the money among your creditors. An IVA allows you to have more control over your assets than filing for bankruptcy.

IVA agreements can show and lower your credit score. It will be difficult to get credit after an IVA agreement is in place.

Your provider should be contacted immediately if your company is having difficulty paying its monthly repayments. Avoid multiple missed payments if possible by accessing finance such as cash flow loans to help you trade out of the poor business financial position.

2) Partnership

This is similar to the sole trader, except that the business partners share the responsibility for the debt. All business partners must find a way to repay the debt if the company fails to pay it back. The debt can be restructured using an IVA, or as a last resort, bankruptcy.


3) Limited company

Your business’s credit will be repaid against your company. The payment will not be made against your company’s name. A voluntary arrangement by a limited company may be offered to pay creditors for a set period if the company goes bankrupt.

If creditors agree, trading will be permitted. However, your assets could be liquidated if the CVA is not feasible.

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What is considered business debt?

Your business can incur the most obvious type of debt through large or small business loans. However, it could also be caused by credit lines, overdrafts and business credit cards. It’s important to have a good business credit score when looking for finance.

A business credit card can be a valuable tool to increase working capital and manage cash flow. The information related to your business credit card account may be included on your credit report depending on how it was set up.

For example, if you are an employee of an organisation that has given you a business credit line for business expenses, it is unlikely that this will affect your personal finances.

It’s also important to know that personal loans you used to finance your company, such as homeowner loans, will appear on your credit report. Your score can be affected by using a personal credit card for business expenses.

What effect will my business loan have on my personal finances?

If you’re a sole trader it will be your name on all debts owed to your business. Late payments or defaults that you make can also damage your personal finances.

Your business may be a limited company. However, your name will appear on the debt. This leaves your personal credit score unaffected if your company falls short.

There are a few strategies that you can use to ensure your personal credit history and business debt are not negatively impacted by your business debt.

1. Get the right credit card for your business

A business credit card may be available that doesn’t report consumer credit reporting agency acts as a routine. To keep the arrangement in place, you must be punctual and reliable with your payments. Most business credit cards will report the company if you default on a card.

2. Your business should be structured accordingly

Sole traders’ personal and business credit scores can be identical. Therefore, it may be better to establish your business in a partnership or limited company. If you have impaired credit, then you should fix your business credit score to get better options when looking for finance.

3. Consult your lender

Open communication with your lender can help you to understand if they will routinely check your personal credit file in order to approve a payment plan or business loan. Before you accept a financial deal, it is a good idea to inquire about the lender’s reporting policy.

Check your contracts to determine if the lender requests a personal guarantee. You could be held responsible if you sign the contract with your name and not that of your company.

What could my personal debt do to a business loan?

Poor credit reports and personal debt can impact your chances of getting a loan for business. It all depends on your company structure and whether your business has a good credit score.

While a lender might focus on your company’s credit score, they may also be interested in your historical balance sheets and revenue streams.

Your personal credit could be used to finance a loan for your company. To help pay your company’s expenses, such as a home equity loan, you can increase your personal credit score by taking out a personal loan.

If your company is young and has not had any credit history, you may still be eligible for a loan.

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Where can I get free debt support?

Learn more about how to be open about potential problems with debt by visiting our guide to discuss debt and how you can get free support.

Here is a list that will help you if you are in debt. These services can be contacted directly for confidential and personal advice.

What is considered business debt?

While business debt is not too different from personal debt, it is still used for commercial purposes. Below is a list of the most common business debts.

You must immediately contact your lender if you are behind on your payments.

You will begin to see a negative impact on your credit score if you do not seek out guidance from your lender or continue to miss payments.

If you are having financial issues contact us today, we can help with personal debts and business finances.

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