My Personal Credit: Can It Affect My Ability To Get A Business Loan?

The reality of living in Canada is that you need good credit. Major purchases like a car or a house usually mean having to take out a loan or a mortgage. Renters normally have to provide their credit reports before a landlord will approve them as tenants. There are even some employers who require a credit check before hiring a prospective employee.

Many would-be entrepreneurs in Canada may have terrific ideas, great business plans, but short on the funds that it takes to launch a business or to keep it afloat. That’s where a business loan often becomes a necessity. You may be wondering how your personal credit can affect your ability to get a business loan.

The short answer is, yes, it can. But there are also many other variables that go along with being able to get a business loan. There are also different avenues to pursue those loans if your credit is less than perfect.

Many lenders review your personal credit before approving you for business credit especially if you personally guarantee a small business loan. That guarantee means you will be personally liable for the debt of the business loan — something you want to sidestep since it could put a dent into your personal assets.

The good news is your personal credit status doesn’t have to hold your business back. Don’t throw the towel in on getting a business loan, even if your personal credit is less than perfect. Here are some ways to start:

Establish and incorporate your business

Credit bureaus can only create credit reports for businesses that exist. To start building business credit, incorporate your company or form a limited liability company (LLC). This will keep business and personal financial matters separate. Open chequing and savings accounts for your business and the legal name of the business in all financial transactions. 

Strive to improve your Credit

Get a copy of your credit report from Equifax or TransUnion and go over it with a fine-toothed comb. Make sure everything in it is accurate. If there are mistakes, you need to contact the agencies to look into the erroneous information. Read more about improving your credit score in our article here.

With regards to your score, there are a few things you can do to improve it: pay your bills on time with at least the minimum amount, use no more than 30% of the total credit available to you, and don’t apply for too many credit products in a small time frame. With the proper discipline, following these guidelines can go a long way.

Get the right people on your team

Surround yourself with associates who have impeccable credit. When you have a financially savvy management team, it could bode well for you when you’re seeking a business loan. In business, it is wise to get a lawyer to draft a document outlining everyone’s role in the business.

Get a guarantor

If a family member or a friend offers to become a guarantor for the loan, him or her up on the offer. Keep in mind, the guarantor must meet the lender’s criteria. Make sure the person understands the commitment since being a consignor means the loan will appear on his or her credit history and may affect their own borrowing power. He or she has to understand what they will be liable for if you default on the loan.

Be proactive

Some personal investment is necessary for a business start up. Visit your lender prior to draining your savings. Once your personal credit score takes a hit, it will be more difficult to secure a business loan. Structure your business plan well from the get-go. Also, think about alternative sources to finance your business. It may increase your credibility in lenders’ eyes.

Ask about a Revenue loan

Revenue loans are pretty new in Canada. They could be a solution to financing problems. Lenders look at your regular revenue, revenue the business is generating. The interest for this type of loan is usually higher, but so is the approval rate. The amount of the loan is based on your regular bank account deposits. The loan is repaid in small daily increments from your business bank account.

Consider government help

Small business owners have been helped by the Government of Canada for years. The Canada Small Business Financing Program shares some of the risk the lender takes on when providing loans to small businesses. This program allows:

  • Start-ups to get the funding they need;
  • Established businesses to expand, make improvements and upgrades;
  • Small businesses to have access to loans that are difficult to access;
  • Create new jobs in Canada to stimulate economic growth.

Never give up

Even if your personal credit is not the most stellar, don’t give up trying to get a business loan. There are many financing options available and there is likely one to suit your business situation and needs. If you are turned down by traditional lenders, take a deep breath and look elsewhere.