Does Your Personal Credit Score Affect The Credit Score Of Your Business?

When you’re running a business, accessing the best routes to funding can give you a competitive advantage. But do your personal credit score and financial history have an impact on your company’s ability to borrow from lenders?

In some instances, your personal credit history can affect the potential business credit score for your business, while your business credit score can also affect your personal credit, such as with a business overdraft.

Let’s take a look at why this is, the differences between a personal and business credit rating and what you can do to minimise any negative impact.

How are your personal and business credit scores linked?

Your personal credit score is a measurement of your creditworthiness – in other words, how much of a risk you pose to a lender when applying for credit, finance or a loan. The higher your credit score, the lower your risk as a borrower (and vice versa), and the more likely that the lender will agree to loan you the money.

Personal credit scores and business credit scores both gauge your ability to pay back a loan, but they do differ in some quite specific ways.

Let’s take a look at the key differences:

• Your personal credit score is calculated by looking at the health of your individual finances, your credit utilisation and your credit history. If you use credit responsibly and pay your bills on time, you’re more likely to achieve a good personal credit score.
• A business credit score is also a measure of creditworthiness, but it looks specifically at your company finances and credit usage. It will be based on your statutory accounts, payment history and the cash flow in your company. 
• A personal credit score is calculated solely by looking at your personal finances. Your business credit score is generally measured based on your company finances and credit history – but there are occasions where a company director’s personal credit score may be factored into the company credit rating. 

What do lenders look for when assessing business loan applications?

Startups, new businesses and companies with limited trading history may find that their directors’ personal credit scores are reviewed as part of an application for business funding. This is especially likely if you’re providing security or personal guarantees on any loan, finance agreement or credit agreement.

Lenders want to know that any borrowers have the financial ability to make regular loan repayments, pay the agreed interest on the loan and not default on the terms of the loan agreement. In short, they’re looking for a low-risk borrower. 

To review your company’s suitability for a loan, lenders will look at:

1. Your cash-flow position: Lenders will want to see evidence that your business is in a positive cash-flow position. Positive cash flow shows that you have enough cash coming into the business to cover your repayment expenses.
2. Your revenue and profit forecasts: Stable sales lead to predictable revenues, showing that the business has enough customers and sales to generate income, boost cash flow and create healthy profit margins. 
3. Your overall financial health: Lenders will look at publicly available records, such as your statutory accounts to gauge the strength of your finances as a business. They will also look for records showing any County Court Judgements (CCJs) or bankruptcies that demonstrate poor financial health. 
4. Your industry risk: Some industries will be rated as higher risk than others. For example, a small restaurant in the hospitality industry will be seen as high-risk, due to the small margins and high competition in this sector. An electricity provider in the energy sector will be measured as low risk, due to the predictable regular income and stable customer relationships in this industry.
5. Your business credit score: Lenders will place significant weight on the business credit score you’ve been given by the UK’s major credit rating agencies (CRAs). CRAs will also produce metrics that measure your company’s payment performance, forecasted failure rate and other financial metrics. 

What can you do to strengthen your business loan application?

Any steps you can take to improve your business credit score will also boost your chances of finding a lender – and getting access to the right funds. 

Here are some important ways to strengthen both your business credit score and, by association, your business loan application.

Pay your bills on time, every time

A solid history of prompt payment is a major green flag for lenders and the CRAs. Paying your suppliers on time shows good financial management and healthy cash flow – both things that will help to reduce your perceived risk as a borrower.

Be responsible with your credit usage

Get a business credit card for the company and make sensible use of this credit facility. Utilising around 30% of your entire credit limit is good practice and shows that you’re in control of your finances. Try to avoid taking out multiple lines of credit with different providers. This can often be a sign of poor cash flow. 

Improve your financial management

If you’re not already, invest in a modern cloud accounting system. Software like Xero or QuickBooks helps to streamline your bookkeeping, invoicing and cash-flow management, while also giving you detailed reporting on your cash and revenue positions. This helps you stay in control and make informed financial decisions.

Check your SIC code

Your Standard Industry Code (SIC) defines your industry and the specific niche that you trade in. If your business is wrongly categorised in a high-risk industry, lenders and CRAs will potentially misclassify you as being uncreditworthy. 

Can a bad personal credit score stop you from getting a business loan?

As we’ve mentioned, there are situations where a lender won’t just assess your company finances when reviewing a loan application. There are some scenarios where the bank or finance provider is likely to also look at your personal credit score and individual credit history. A poor personal credit score could be a red flag that makes a lender think twice about offering you a business loan. 

Let’s look at a few situations where your personal credit score could be taken into account:

• New companies: Lenders are likely to rely on your personal credit history when your company lacks a financial track record. They’ll assess your personal financial responsibility as an indicator of how you'll manage business debt.
• Small businesses: Small business finances are often intrinsically linked with the owner's own money. Lenders will consider your personal credit alongside your business financials, especially for smaller or less-established entities.
• Personal guarantees: If you provide a personal guarantee for the loan, your personal credit score is crucial. You become personally liable for the loan, so lenders will want to understand your ability to repay, if the business defaults.
• Lack of business credit: If you’ve not made use of any lines of credit, lenders will rely on your personal credit to gauge your creditworthiness. Your personal credit behavior fills the information gap for the company.
• Start-up funding: Startups often lack revenue or assets, so lenders will use the founders' personal credit as a gauge of your ability to repay the loan. Your personal financial position can become a key factor in securing initial funding.
• Specific loan types: Unsecured loans, or low-documentation loans, often place greater emphasis on the director's personal creditworthiness due to the reduced security.

How do business credit cards impact your personal credit score?

Details of your business credit card won’t usually appear on your personal credit report. This is due to the separation of your individual finances and the equity you hold in any limited companies where you’re a director, unless you have provided a personal guarantee or suffered a default or delinquency..

Here are some examples:

Personal guarantee

If you provide a personal guarantee for your business credit card, it’s likely that the card and your payment history will be reported to your personal credit reports. This is because you’re personally liable for the debt, and lenders will want to track your creditworthiness in relation to that obligation.  

Default or delinquency 

Even if you don't have a personal guarantee, if your business defaults on the credit card, or becomes significantly delinquent, the credit card issuer may report this to your personal credit reports. This can have a negative impact on your personal credit score.  

Some issuers report to your personal credit history

Not all business credit card issuers do this, but some may choose to report your business credit card activity to personal credit bureaus, regardless of a personal guarantee. This is more common with smaller business credit cards.

How to be responsible with your business credit use

In situations where your business credit card usage appears on your personal credit report, it’s important to take care with how you use this business credit. 

• Pay the full balance on time each month, and make timely payments that exceed the minimum amount that’s due for the card.
• Maintain a low credit utilisation ratio, ideally keeping the balance well below the credit limit. This shows controlled spending and a healthy financial position.
• Separate business expenses from personal spending by only using the card for legitimate business purchases. This creates a clear audit trail. 
• Check your account for unauthorised transactions, and quickly address any issues with the card issuer to safeguard against fraud.
• Have a clear repayment plan and budget for the business credit card, and make sure you have sufficient funds to pay back the outstanding balance.

Does a business loan affect your personal credit history?

By taking out a business loan, you and your fellow directors are entering into a finance agreement with the lender. Depending on the type of loan, and personal guarantees to secure the loan, this business loan may appear on your personal credit report. 

How can this affect your personal finances?

• Personal guarantees are the main driver: If you've signed a personal guarantee against the loan, the loan will appear on your personal credit report.
• Some lenders automatically report on business finance: Lenders may report business loans to personal credit bureaus, as part of their usual process..
• Default is a red flag: If your business loan goes into default, it's highly likely to affect your personal credit, regardless of any guarantee.

To stop your business finance having a negative impact on your personal finance, it’s vital to be responsible with your use of credit and to be timely with your repayments.

How can I stop my personal credit from affecting my business?

Having a clear separation between your personal credit and business credit usage is good practice. Becoming a limited company and having separate personal and business bank accounts helps to reduce your overall risk.

Let’s look in more detail at how this works:

Open separate business bank accounts 

Having separate personal and business bank accounts allows you to run, record and track your individual and company finances entirely independently. This helps to show your independence from the business, and that the business is self-funding.

Have separate credit lines

Keep your credit lines distinct, so you can demonstrate a clear separation between any credit you’ve taken out personally and credit that’s associated with the company. This lowers the risk of your business credit score having a negative impact on your personal credit rating (and vice versa). 

Register as a limited company to limit liability

If you’re not incorporated – e.g. you’re currently running your business as a sole trader – register as a limited company ASAP. By incorporating the business and becoming a director, you create a legal distinction between your personal wealth and any capital (and credit) that’s held in the business. This lowers your liability and risk. 

Build strong, independent business credit

Building up your credit as a business helps to strengthen your business credit score and show the separation between your own personal credit usage and the lines of credit that are associated with the business. 

Ultimately, you want your company and personal credit usage to be independent, with a credit rating that can gradually be worked on and improved over time. 

How can you improve both your personal and business credit score?

As we’ve seen throughout this guide, the key to a good credit score is being responsible and organised with your finances and your use of any credit lines. 

Pay your bills on time, keep good records and manage your finances and credit with a watchful eye. This applies equally to your personal finances and the financial management of your business. 

The more oversight you have of your cash flow and credit positions, the better your rating will be when viewed by CRAs and lenders. 

Are there alternatives to taking out a business credit card?

Sensible use of a business credit card is a great way to open up a line of credit and to demonstrate that you can manage your finances in a responsible way.

But signing up for a credit card isn’t your only option. When you’re looking to improve your cash position and funding for the business, taking out a short-term, flexible loan can be a great way to find additional funding.

Business finance products, like iwoca’s Flexi-Loans, help you bring extra capital into the business, without the worry of having to apply for a business credit card or a specific line of credit with your suppliers. 

Taking out a flexible business loan:

1. Brings fresh funding into the business, so you have options when thinking about your next growth move, or need to cover unexpected operational costs.
2. Allows you to pay back the loan over an agreed period, spreading the cost of funding and making the repayments affordable within your current budget.
3. Gets you the funding quickly, so you can act fast on any business opportunities, or resolve cash-flow issues without any costly delays. 

Iwoca: flexible finance your business

An iwoca Flexi-Loan is the fast, flexible way to fund your business – whatever your capital needs may be. We believe in supporting your enterprise and making it easier for small businesses to fund the next stage in their growth journey.

With iwoca:

• You can apply for a loan online in minutes
• We’ll give you an answer on your loan application within 24 hours
• Borrow anything from £1,000 to £1,000,000
• No early repayments fees and interest only charged on funds you draw down

Apply for a Flexi-Loan to boost your capital