If you’re starting your own business, one of the most stressful aspects of the process may be financing it. If you need a business loan, you’ll find there are loops you’ll have to jump through. If your personal credit scores are low, then you may reasonably feel nervous about the process. Take heart, however. While having a less than stellar credit score can make getting a business loan tricky, it is possible to overcome this hurdle.

Why Is Credit So Important for Loan Approval?

Lenders carefully examine your credit history when you apply for any type of loan because they seek to manage their risk. Before they lend you money, they want to assure themselves that there is a good possibility that they will get paid back. So they examine how you’ve managed debts in the past. Did you make payments in a timely fashion? Have you ever declared bankruptcy or defaulted on a loan? Your past history gives them metrics with which they can evaluate potential future performance.

What Effects Will My Personal Credit Have on My Business?

While your credit history is important, it is only one of many factors that are used by lenders when they examine your application for a loan. However, it is a critical component of the approval process and can have several effects which include

  • Ultimate approval of the loan as well as the amount provided
  • Terms and payment schedule
  • Your interest rate on the loan

Will Lenders Always Consider My Personal Credit for A Business Loan?

If you’ve already got a business and have already established a good history of business credit, then lenders will be more inclined to give you the benefit of the doubt. Therefore, the largest hurdles are typically the initial ones.

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There are obviously certain conditions in which your personal credit history will take on a greater significance.

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Dealing with Traditional Lenders such as Banks

Banks are guided by strict rules and have limited flexibility. They are subject to federal guidelines and hard limits regarding what types of funding can be allowed.

Lack of Track Record as a Start-up

Start-ups don’t have an established track record when it comes to business credit. Therefore, lenders have no choice but to evaluate the applicant’s personal credit score in this situation. This is particularly true if he or she has a sole proprietorship or has just a couple of employees. In those situations, the person’s personal credit score becomes more important.

A Low Personal Credit Score

The greater the number of negatives in your personal credit history, the more wary the lender will be. You can mitigate this with a strong business credit history, but if you are just starting out, that’s much harder.

So how do you apply for small business loans with bad credit? According to Lantern by SoFi, “before you start to apply for unsecured startup business loans, it can help to do some prep work to strengthen your pitch.” Even someone with bad personal credit can offer a meticulous business plan and outline strategies that will reassure lenders.

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