A low credit score is the last thing you want when you are running a business. Running a small or medium scale business is not that easy. There are times when you can hit a significant roadblock due to a financial crunch. A company or a firm is assessed through a Company Credit Report (CCR) for its creditworthiness. Similarly, an individual is also evaluated and verified for being creditworthy through his CIBIL score. You have to make sure that while taking an SME loan, your personal credit score does not get affected.
Although personal and business credit scores are dealt with separately, there are instances where your personal credit score might get affected while taking a loan for your SME business. People are often curious, and rightly so, about the effect of taking a business loan on their personal credit score.
Can SME Loan Affect Your Personal Credit Score?
In this article, we will be discussing various ways through which your personal credit score gets affected by taking a business loan.
However, let us first have a look at the effect of taking a business loan on your company’s credit score. If your financier makes a Hard Credit Enquiry, then your company’s credit score might get affected. A hard check involves checking a company’s entire credit history and can reduce the credit point score by 1 to 5 points. On the other hand, if the financier does a soft credit check where the form of inquiry is only casual, then the company’s credit score stands unaffected.
Now, let us have a look at the effect of an SME loan on your personal credit score.
Effect of SME Loan on Personal Credit Score
It is not always that when you take a loan for your company does your credit score gets affected. It is only in certain circumstances when the same can happen. Let us discuss them one by one.
If your business is a proprietorship business, then the personal credit score is considered as the business credit score. Since there is no apparent difference between the two, in this case, your personal credit score is bound to get affected while taking a loan.
A partnership business is when two or more individuals are working as shareholders in the industry. This scenario is very similar to that of a proprietorship, and hence, the effect on your personal credit score is also the same. Taking an SME loan for a partnership business will affect your credit score if the financial institution does a hard credit check.
A limited company has its own corporate identity. This identity is separate from the shareholders of the business. Hence, the shareholders and directors not liable for any form of debt the company incurs. Still, the personal credit history of all the shareholders is assessed and verified before a loan can be sanctioned.
Hence, it is imperative from the points given above that a good personal credit score is required and helpful even for a business loan and also, taking an SME loan can affect your credit score too.
Following are some of the best practices following to keep up a good personal credit score:
● The key to maintaining a good credit score is not to default payments.
● The debt you wish to incur must not exceed your income.
● Do not apply for too many loans simultaneously
● Do not opt for long tenures as it could lead to a low credit score.
A good personal credit score is something you should keep as a priority while running a business. It comes very handily when striking good deals with financial institutions.