When applying for a business loan, entrepreneurs may be concerned about the impact to personal credit scores.*
Most loans to small businesses require a personal guarantee. This makes it necessary to check or “run” a business owner's personal credit in order to make a loan offer.
Many business owners seeking financing are concerned about having their credit run multiple times. Those concerns are often valid.
How Many Points Will Your FICO Score Drop For each Loan Inquiry?
According to myFICO, one or two loan inquiries may result in zero impact to some borrowers' credit scores. Other borrowers, however, find that each inquiry may damage your credit score by up to 5 points.
This means that one or two inquiries may have a negligible impact on your credit score. Many inquiries can have a larger impact. myFICO goes on to explain that computer models show that people with six or more inquiries on their credit reports are eight times more likely to declare bankruptcy than people with zero inquiries.
Experts warn that when you apply for loans through brokers, they may shop your transaction to 5 or 6 places, which can result in 5 to 6 hits to your personal credit score.
To avoid having more inquiries than what was expected, it may be best to only work with direct lenders such as LoanMe. When working with a broker, you may want to confirm in writing how many times credit will be run before applying for a loan.
Will Business Borrowing Impact FICO Scores?
While multiple credit inquiries may harm FICO scores, having a loan may help your FICO score. Nerdwallet reports that paying a business loan on time can improve both personal and business credit scores. Nerdwallet further recommends only borrowing from lenders that report to credit bureaus.
Borrowers can raise their FICO scores and establish stronger credit histories by working with loan companies that report to both business and personal credit bureaus.
LoanMe reports to both business and personal credit bureaus. This can help build a credit profile and make it easier to borrow money in the future.
Will a Loan from LoanMe hurt your credit?
How much impact debt has on a credit score depends highly on the type of debt.
For example, a business may use a credit card or other type of revolving credit to access funds. Revolving debt is any type of loan that does not have fixed payments.
Historical models show that borrowers with high utilization of credit card or other revolving debt are riskier than those who carry little revolving debt or who regularly pay down their balances.
The product LoanMe offers is a small business term loan. This is also known as an "installment loan." Installment loans are made for a set period of time with a set payment.
Credit scoring models are usually very forgiving when it comes to installment loans. Credit agencies are much less concerned with the amount of installment debt you might owe than your utilization of revolving credit.
When financing a business, it's important to minimize the number of places shopped, as having many inquiries in a short time period can have negative impact to FICO scores.
Further, experts recommend working only with lenders who will report your loan to credit agencies. This is because paying a loan on time can raise credit scores.
Lastly, installment loans can be much more friendly to your credit score (business or personal) than revolving loans.
Working with LoanMe means:
• Not creating multiple loan inquiries.
• Reporting to both business and personal credit bureaus to help build your credit.
• Installment loans which can potentially have less negative impact to FICO score than revolving debt.
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*This article has been prepared for general information purposes only. The information presented is not legal, financial, tax or accounting advice, is not to be acted on as such, and is subject to change without notice. Credit approval is subject to LoanMe's credit standards, and actual terms (including actual loan amount) may vary by applicant. LoanMe requires certain supporting documentation with each new application. If you have any questions regarding this, call us at 844-311–2274. California loans are made pursuant to LoanMe's California Department of Business Oversight Finance Lenders Law License #603K061. LoanMe also offers loans in certain other states which may have higher minimum loan amounts. Copyright © 2016 LoanMe, Inc. All rights reserved.