First of all, business financing decisions for debt capital tend to limit credit assessments to business credit if there are no personal guarantees required by business owners, shareholders, or third parties. However, this is not an absolute rule, and in many cases, personal credit still creeps into the decision making process.
Because personal credit is a form of character assessment, reflecting how an individual carries through on the commitments he or she makes.
There may be ample financial support for debt financing, but a poor personal credit track record of a major owner of a business can still lead to an application decline.
In cases where the security offered by a business and any required covenants are not sufficient to secure the lender, then personal credit becomes even more of a major factor in credit decisions.
The third scenario when personal credit comes into play with business financing is when the business itself has very little or no established credit. This can be very common with businesses under 3 years in existence and also in older businesses that work with smaller suppliers than don’t report their results to credit reporting agencies.
While I can follow the logic of utilizing personal credit reports when assessing business financing requests, the practice is far from reliable due to inaccuracies in personal credit reports. Remember that the personal credit reporting agencies do verify the information placed in your credit report, so any errors can potentially impact a business financing credit decision for a business loan you may apply for.
This is yet another reason to regularly check you credit report for errors and take the time to make it as accurate as possible.