Does a Business Loan Affect My Personal Credit Score?
Updated: Aug 17
If you run a limited company and take out a business loan, you may wonder whether the borrowing will appear on your personal credit file or affect your personal credit score.
In many cases, a loan made to a limited company is borrowing by the company rather than by the individual director.
However, the position isn't always completely separate. A lender may carry out a personal credit search on directors or guarantors when assessing an application, and personal guarantees can create personal liability if the company subsequently defaults.
The impact therefore depends on the structure of the business, the type of finance and the lender's credit-search and reporting practices.
Is a limited company's credit separate from my personal credit?
Generally, yes.
A limited company is a separate legal entity from its directors and shareholders.
If ABC Limited takes out a £50,000 business loan, the borrower is normally ABC Limited rather than its director personally.
The company can have its own:
credit history;
business credit score;
borrowing;
County Court Judgments (CCJs); and
payment history.
This is different from a sole trader, where there isn't the same legal separation between the individual and the business.
However, lenders considering finance for smaller companies will often also look at the people behind the business.
Will a business lender search my personal credit file?
Potentially.
When assessing an SME business loan, a lender may carry out credit searches on:
the company;
directors;
shareholders; and
proposed personal guarantors.
Exactly who is searched and what type of search is undertaken depends on the lender and product.
This is because the financial history of the people controlling a smaller business can provide useful information when assessing credit risk.
For example, significant recent adverse credit against a director may be relevant even where the company itself has a relatively clean credit history.
Does a business credit search affect my personal credit score?
A search carried out solely against the limited company won't normally be the same as a personal credit application appearing on your individual credit file.
However, if the lender also carries out a search against you personally, that search may appear on your personal credit report depending on the type of search undertaken.
An important distinction is between soft and hard credit searches.
What is a soft credit search?
A soft search allows information on a credit file to be reviewed without leaving the same type of visible footprint as a hard credit application search.
Soft searches generally don't affect your credit score and aren't normally visible to other lenders in the same way as hard searches.
They can be used for purposes such as eligibility checks, identity verification or preliminary credit assessments.
What is a hard credit search?
A hard search is generally associated with a formal application for credit.
It can be recorded on your credit file and may be visible to other lenders.
A single hard search isn't necessarily a problem. However, multiple credit applications over a short period can potentially influence how future lenders assess your credit profile.
If you're unsure, you can ask the business lender whether it intends to carry out a personal search and whether that search will be hard or soft.
Does a personal guarantee appear on my credit file?
Not necessarily simply because you have signed one.
A personal guarantee is different from taking out a personal loan.
The limited company remains the borrower, while the guarantor agrees to become responsible for specified obligations if the company fails to meet them. However, the lender may have carried out a personal credit search as part of accepting you as a guarantor.
More importantly, if the company defaults and liability under the guarantee is pursued, the consequences can become much more significant.
You can read more in our guide to What Is a Personal Guarantee on a Business Loan?
What happens to my personal credit if the company misses a payment?
A missed payment by a limited company doesn't necessarily mean that a missed payment will automatically appear on a director's personal credit file.
The company and director are separate legal persons.
However, the position can become more complicated where there is a personal guarantee and the company's default ultimately results in the lender pursuing the guarantor.
If legal proceedings are subsequently brought against the guarantor and result in a personal judgment, that can have significant implications for the individual's credit profile.
The exact consequences will depend on what happens following the company's default.
Does being a director of a company with bad credit affect me personally?
Not automatically.
A company's poor credit history doesn't simply become the director's personal credit history.
However, business lenders may consider connections between directors and companies when making lending decisions.
For example, if a director has previously been involved with businesses that have experienced significant financial difficulties, a lender may want to understand the circumstances.
That doesn't mean a previous company failure automatically prevents a director from obtaining finance for another business.
Context matters.
What if I am a sole trader?
The position is different for sole traders.
A sole trader isn't legally separate from the business in the way that a limited company is.
The individual is effectively the business.
As a result, borrowing undertaken as a sole trader is much more closely connected to the individual's personal financial position.
Personal credit history is therefore likely to play a particularly important role when a sole trader applies for finance.
What if I am in a partnership?
This depends on the type of partnership.
Traditional partnerships and limited liability partnerships have different legal structures, and lenders may assess partners or members differently depending on the facility.
If you operate through a partnership, it is worth establishing at the outset who will be the borrower and whether individual partners will have personal liability or be required to provide guarantees.
Can my personal credit affect whether my company gets a business loan?
Yes, potentially.
Even though the company is the borrower, some SME lenders consider the personal credit history of directors or guarantors as part of the overall assessment.
A director with an excellent personal credit history doesn't make a weak business automatically creditworthy.
Likewise, an isolated historic personal credit issue doesn't necessarily mean that a financially strong company can't borrow.
A lender is likely to consider factors such as:
severity of the adverse credit;
how recently it occurred;
whether it has been resolved;
the circumstances behind it;
the director's subsequent credit conduct; and
the financial strength of the business itself.
A historic £300 CCJ is clearly different from substantial recent unpaid debts.
Can I get a business loan with poor personal credit?
Potentially.
Lender criteria vary considerably.
Some lenders have strict credit-score requirements. Others take a broader view of the company and the circumstances surrounding any adverse credit.
The strength of the business can therefore matter considerably.
A lender may look at its:
turnover, profitability, liquidity, cash flow, recent bank conduct, existing borrowing and trading history.
The age and nature of the personal credit issue will also be relevant.
We'll look at this in more detail in our guide to Can I Get a Business Loan With Bad Credit?
Should I check my personal credit report before applying?
It can be useful, particularly if you expect to provide a personal guarantee.
Checking your report allows you to identify any unexpected information before making an application.
It can also help if there is something that will require explanation.
For example, if a historic CCJ arose from a disputed bill and has subsequently been satisfied, providing that context may be more useful than waiting for the lender to identify it.
Should I make several business loan applications at once?
Be careful about making numerous applications without understanding what searches will be undertaken.
Shopping around for appropriate business finance is perfectly reasonable.
However, if several lenders carry out hard personal credit searches within a short period, those searches could potentially be visible to subsequent lenders.
Using eligibility checks or establishing the type of search being conducted before proceeding can help avoid unnecessary hard searches.
The important distinction is between comparing finance options and repeatedly making formal credit applications.
What should I ask a lender before applying?
If you're concerned about your personal credit file, ask:
Will you search me personally?
Will the search be hard or soft?
Will you search all directors or only guarantors?
Do you require a personal guarantee?
Will the business loan itself be reported to a personal credit reference agency?
A lender should be able to explain the searches and information it requires as part of its application process.
Applying for business finance with Adelpha Capital
Adelpha Capital provides business finance to established UK SMEs.
Our assessment can include information about both the company and relevant individuals.
We consider the overall lending proposition rather than relying solely on a single credit score, including factors such as turnover, cash flow, recent bank conduct, trading history and existing borrowing.
If you're considering business finance, you can apply online or contact the Adelpha Capital team to discuss your requirements.