Introduction to Business Credit
A business credit score is a vital measure of your company’s financial health and creditworthiness. Just as individuals have personal credit scores, businesses in New Zealand can obtain a business credit report that details their business credit scores, payment history, and other essential credit information. Lenders, suppliers, and even potential partners use these business credit reports to assess the credit risk associated with your company before extending terms, offering funding, or entering into agreements.
Maintaining a good business credit score can open doors to better loan options, lower interest rates, and more favorable terms from suppliers. On the other hand, a low credit score can limit your access to credit, increase borrowing costs, and even affect your ability to secure new business opportunities. That’s why it’s crucial for businesses—especially small businesses—to understand the factors that affect their credit scores, such as timely payment of bills, responsible credit utilization, and the presence of any public records like tax liens or legal trouble.
Regularly checking your business credit report allows you to track your company’s credit position and spot any issues early. By monitoring your payment history and credit information, you can take proactive steps to improve your score—like paying bills on time, reducing outstanding debt, and resolving any negative items that appear on your report. This not only strengthens your company’s financial health but also reduces the risk of being seen as a high-risk borrower by lenders and other businesses.
Business credit checks aren’t just for your own company. Many businesses use credit checks and business credit reports to assess the creditworthiness of customers, suppliers, and partners. This helps reduce risk by ensuring you’re working with reliable companies that are likely to pay on time and honor their commitments. By using business credit information to make informed decisions, you can protect your cash flow and build stronger, more secure business relationships.
It’s also important to distinguish between your business credit score and your personal credit score. While your personal credit score reflects your individual credit history, your business credit score is determined by your company’s credit activity and financial behavior. Building a strong business credit file helps separate your personal and business finances, reducing your personal risk and making it easier to access funding for your business’s growth.
In summary, understanding and managing your business credit score is essential for any company looking to thrive. By staying on top of your business credit report, making timely payments, and using credit responsibly, you can improve your company’s credit position, reduce credit risk, and ensure you have access to the funding and opportunities you need to succeed. Whether you’re just starting out or looking to expand, a strong business credit score is one of your most valuable financial tools.
Could a business loan application affect your personal credit? Let’s take a look at the issue to see if you need to worry.
Perhaps you’re gearing up to expand your business. Or maybe you need a little extra cash to help you through a tough time.
Either way, you’re going to need to lodge a business loan application. Many small business owners explore various loan options to fund their business idea, and most small business loans require careful consideration of terms and eligibility. Before extending terms or funding, lenders often assess your business credit score to determine whether you will be offered payment in advance or on credit, based on your creditworthiness.
But you might feel anxious about one question:
Will a business loan affect my credit?
You’ve heard horror stories about people destroying their credit score. Take Anna as an example:
Anna needed a loan to buy a few things for her business. She knew she had a solid credit score, so she started sending in applications. Small business loans are a common choice for entrepreneurs like Anna, but understanding the different loan options is crucial to avoid negative impacts on your credit.
Her intent was to find out which lender would offer a better deal.
She didn’t realise that each loan application placed a mark on her credit report. Her report now shows her as someone in financial distress, even though she’s only shopping around. Lenders use credit scores to determine the risk level and eligibility for different loan products, so multiple applications can make you appear riskier.
Now it’s even harder for her to secure any sort of loan.
Could the same thing happen to you?
This article looks at how a business loan may affect your credit. It tells you what you need to know before you make a business loan application.
Lenders Take All Credit Scores into Account
Let’s get one thing out of the way first. Lenders don’t just consider your business credit when checking your application. They’ll also take a look at your personal credit history and your personal credit rating. If you are a business owner with a poor credit history, you may find it more difficult to secure a loan, as lenders often require a personal guarantee and assess your financial responsibility.
That’s why it’s important to know the differences between a personal and business credit file.
A personal credit file contains information about any loan applications you’ve made. It also offers data about any loans or credit facilities you currently have active, showing whether these are being paid on time, which can directly affect your credit rating. This file alerts lenders to any judgements, missed payments, late payments, or other issues, too. Late payments can negatively affect your personal credit rating and reduce your chances of loan approval.
Your business credit file focuses specifically on your company. Other businesses may check this file to ensure you’re safe to do business with. Lenders will look at it to check your business’ financial health, assess your business credit history, and evaluate your business’s creditworthiness so they can ensure you’re safe to lend to. Payment history, including whether invoices are paid promptly, is a key factor affecting your business credit score.
Soft and Hard Inquiries
Let’s confront the key question:
Will a business loan affect my credit?
It may. It all comes down to the sorts of inquiries the lender runs during the application process. Traditional lenders typically perform hard inquiries as part of business loan applications, which can negatively impact your credit score.
The lender may use two types of inquiries – soft and hard.
Soft Inquiries
The good news about soft inquiries is that they don’t cause any negative issues with your credit score. At worst, they’re noted down as a request for access to your credit file. At least they leave no black marks, which means you don’t have to worry about Anna’s situation.
In fact, your business and personal credit scores may undergo soft inquiries several times per day. For example, a credit bureau will run this type of check if you ask to see your credit score.
Hard Inquiries
These are the ones you have to worry about.
A lender will run hard inquiries on both your personal and business credit files when you apply for a business loan. Many business loan applications require personal guarantees, which means you may be personally responsible for repaying the loan if your business cannot. A personal guarantee means you are using your personal assets as collateral for the loan, increasing your personal financial responsibility. These are essentially the “official” version of a lender’s credit check. And they’re recorded on your credit files as such. This will affect your credit score.
A single application will have a minimal effect. But as Anna discovered, having a lot of hard credit pulls recorded on your file over a short period of time can cause damage.
A hard credit inquiry will also show more details about your history. The lender will be able to see what loans you have and which lenders have refused your applications in the past.
The good news is that lenders can’t conduct this sort of inquiry without your permission. You have a measure of control you can use to prevent these inquiries from having a major effect.
What Can You do to Minimise the Effects of Hard Inquiries
Here are a few things that will help you ensure your application doesn’t damage your personal and business credit: Business owners should focus on securing a loan by building and maintaining a strong business’s credit history, as this can improve approval chances and loan terms.
- Don’t apply for several loans in a short period of time. This is the issue that caught Anna out. It can lead to lenders getting an inaccurate picture of your financial viability. Even if you have a clear track record of making repayments, too many applications can make it seem like you’re in distress. This makes you a risk, which leads to more rejections. And each rejection is another black mark on your credit score.
- Make sure you understand the lender’s exact requirements before submitting an application. Mistakes at this stage could lead to a hard inquiry without any need for it. You may get rejected because of the mistake, but that inquiry still sits on your record.
- Do whatever you can to improve your personal credit score before applying. Maintain a solid track record of on-time repayments and try to clear as many debts as possible. It may be worth holding off on your application for a few months if you need to clear up your credit rating.
- Try to maintain low balances on any company credit cards or lines of credit. This will show the lender that your business uses the money it borrows responsibly. Also, work on establishing your business’s credit history by making timely payments and keeping business debts manageable, which can help in securing better loan options.
The idea is to present a healthy credit score, both personal and business, to show the lender you’re not a risk.
Check Your Credit Before Applying
Unfortunately, a business loan could affect your personal credit score. Specifically, applying before you’re ready could lead to a refusal. That would your score to drop. Applying for too many business loans in a short period can also have negative effects.
That’s why it’s so important to check your credit and prepare properly before applying. Opening a business bank account is also a key step in preparing for a business loan application, as it helps separate your personal and business finances.
When you feel like you’re ready, get in touch with us at Unsecured Finance New Zealand. We offer unsecured business loans of up to $100,000 and you can apply in a matter of minutes.
Apply online today to find out if you qualify for a loan, or contact us for more information.
What Happens to Your Credit if You Default on a Business Loan?
Defaulting on a business loan can have serious and lasting effects on both your business credit and your personal credit score—especially if you’ve signed a personal guarantee. When you take out a business loan, many lenders require a personal guarantee, which means you’re personally liable for repaying the loan if your business can’t. If your business misses payments or defaults, the lender can pursue your personal assets, and this negative event will be reported on your personal credit report as well as your business’s credit history.
A default on a business loan is typically reported to credit bureaus, resulting in a significant drop in your credit score. This negative impact can make it much harder to secure future loans or credit, both for your business and personally. The default will remain on your credit report for several years, signaling to other lenders that you may be a higher risk. This can lead to higher interest rates, stricter loan terms, or outright rejections on future credit applications.
Beyond the credit score drop, defaulting on a business loan can trigger late payment fees, increased interest rates, and even legal action from the lender. In some cases, the lender may require additional collateral or security to recover their losses, putting your personal or business assets at further risk.
To avoid the negative impact of a business loan default, it’s crucial to stay on top of your business’s cash flow and ensure you can meet your monthly repayments. Before taking out a loan, carefully review your financial projections and loan terms to make sure the repayments are manageable. If you find yourself struggling to keep up with payments, don’t wait—contact your lender as soon as possible. Many lenders are willing to discuss options like refinancing, restructuring, or temporary payment relief to help you avoid default.
It’s also wise to explore alternative finance options, such as unsecured business loans or invoice financing, which may offer more flexible repayment terms and reduce the risk to your personal credit. Maintaining a good credit score by making timely payments on all your credit obligations is essential, as is regularly monitoring your credit report to catch any issues early.
By taking proactive steps to manage your business loan responsibly, you can protect both your personal and business credit, minimize the risk of default, and keep your business on solid financial ground.
