When you take out a business loan, you’re probably aiming to help your company grow, expand and flourish — but the world of business can be volatile and things don’t always go to plan.
If your business has built up debt and is struggling to pay it off, this may impact your personal credit score if you personally guaranteed the business account in any capacity.
A personal guarantee means that you agreed with your lender that you would be accountable for repayments on a loan if your business cannot afford them. This won’t be the case with every business loan, but it’s worth knowing how and when the business debt could be noted on your personal credit report and affect it down the line.
Read on to find out how business debt might impact your personal finance.
Who is responsible for my business debt?
When you apply to take out a business loan, it’s important to be aware of who is ultimately accountable for the repayments. Generally speaking, there are three scenarios, depending on what type of company you run:
1) Sole trader
From the lender’s perspective, you and your business are the same. A sole trader is personally responsible for their business debt. If you are unable to repay it, the creditors can look to your assets and personal savings accounts, after which you might need to file for an individual voluntary arrangement (IVA).
An IVA is an agreement where you pay off your loans by way of periodic payments to an insolvency practitioner, who then divides this money between your creditors. An IVA can afford you more control of your assets than if you were to file for bankruptcy as a form of insolvency.
IVA agreements will show and reduce your credit score. You will find it hard to secure any other credit whilst an IVA is in place and for a period of time after.
If your business is struggling to fund their repayments, you should contact your provider as soon as possible, try not to get into a position of multiple missed payments.
This route is similar to that of the sole trader, except responsibility of the debt is split between business partners. Should the business fail to pay the debt back, all partners will need to find a way of paying it back personally. If they can’t, the debt may be restructured through an IVA or, as a last resort, bankruptcy.
3) Limited company
Your business’s credit will be borrowed against your company’s name. You will not be held personally accountable for its payment. If a limited company becomes insolvent, it may opt for a company voluntary arrangement (CVA), paying creditors over a fixed period.
If your creditors are obliging, you will be allowed to continue trading. If the CVA is not possible, however, the company’s assets may be liquidated as you would be required to file for administration.
What counts as business debt?
The most obvious form of debt that your business could accrue is from business loans. It may also arise, however, from overdrafts, credit lines, as well as from a business credit card.
A business credit card is a useful tool for boosting working capital and managing cash flow. Depending on how the account for your business credit card is set up, the information relating to it may appear on your personal credit report.
If, for example, you are an employee of a corporation which has provided you with a business credit card for work expenses, this is unlikely to personally affect your finances, as you would be only an authorised business user of the card, nothing more.
On the other hand, if you are a business owner with a business credit card then you would be considerably more than an ‘authorised user’. So before signing up, be sure to understand whether you will be personally guaranteeing the account.
Finally, it’s important to be aware that personal loans used to fund your company, including home equity loans, will also appear on your personal credit report. Using a personal credit card for business expenses can also affect your score.
Will my business loan affect my personal finances?
If you are a sole trader, it’s your name that will appear on every debt owed by your business. Any late payments and defaults you accrue will, therefore, carry with them the potential to damage your personal finances as well.
If your business is run as a limited company, however, it is your business’s name that will appear on the debt, leaving your personal credit report unaffected should your company fall short at some point.
If you are concerned that your business debt is going to impact your personal credit history, there are several strategies you could consider implementing which can help keep the two finance streams separate:
1) Find the right business credit card
You may have the option of a business credit card that does not report activity to the consumer credit reporting agencies as a matter of routine. That being said, you need to be reliable and timely with your payments to keep this arrangement in place. Most business credit cards will report your company if you end up defaulting on the card.
2) Structure your business accordingly
A sole trader’s personal and business credit scores are the same, so you may consider it better to set your business up in such a way that the two are kept separate, perhaps as a partnership or a limited company.
3) Consult your lender
It can be helpful to have an open conversation with your lender about whether they will be habitually checking your personal credit file for a payment plan or business loan. You may also enquire after the lender’s policy for reporting loans before you commit to a financial offer.
Review your contracts to see whether the lender is requesting a personal guarantee. If you sign with your name as opposed to that of your company, you could be held accountable for the terms of the contract.
Could my personal debt impact a business loan?
Personal debt has the potential to lower your prospects for being granted a business loan, as does a poor personal credit report. This can depend on such factors as how your company is structured and whether your business also has its own credit score.
A lender may look only at your business’s credit score, but they may also be concerned with the historical health of your balance sheets and revenue streams, sometimes more so.
If you take out a loan for your business then it could be based at least partly on your personal credit. If you take out a personal loan to help cover your company’s expenses, such as a home equity line of credit, this is much more likely to bring your personal credit score to the fore.
Even if you apply for a business loan, your personal credit history may be called upon if your company is new and therefore lacking history and a healthy turnover to trade on.
Where can I go for free debt support?
Below is a list of organisations designed to help individuals who are in debt. You can contact these services directly for personal and confidential advice.