Will Applying For Small Business Funding Affect My Credit Score?

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Introduction – Business Funding Credit Score

Funding your small business can be very complex sometimes, and there are situations where this funding becomes a necessity to sustain, but with the number of financing options available and with each having its pros and cons. For example, does applying for small business funding affect credit score?

Business and its relation with the market is very uncertain, unplanned things can happen and your small business can sometimes default on loans.

In such conditions, will the actions of your small business and the loan that it defaulted affect the credit score of your own or the credit score of just the business itself? Let’s explore that notion.

What Is The Difference Between A Merchant Cash Advance And Traditional Bank Loan

Understanding the difference between a bank loan and MCA is essential because only after that a small business owner can take the right decision for its business financing.

business funding affect credit score

Merchant Cash Advance

A Merchant cash advance is technically a small business funding only with better prospects. A merchant cash advance is the exchange of a lump sum of money in return for a portion of future sales.

This means that the payment that you make will vary based on the sales that you have made in a week or a month, the duration depends on the terms agreed in the agreement.

According to federal reserves, the approval rate of merchant cash advances is as much as 79 percent. All you need for a Merchant cash advance is a credit score of up to 500, your small business should be in operations for 3 months at least, and have no more than 5 overdrafts or NSFs.

The business can use this advance in any way that it sees fit because there is no regulation about that.

Business Loan

A small business loan taken from a bank or a small business association is the amount of capital that is taken as a loan and has to be repaid in a period that has been agreed on in the agreement, along with the charged interest in addition to the principle, the repayment is usually on monthly basis.

These small business loans charge 7.5% to 10% of annual interest, which is to be paid back in monthly portions. The business can choose to pay more than the fixed amount to reduce the overall amount of interest.

According to surveys, after asking from friends and family, banks are the go-to place for the small business owners that are looking for funding.

This funding is usually required for expansion. According to the Small Business Association, owners borrow $600 billion every year.

business funding affect credit score

The approval rate for small business loans ranges from 16% to 50% depending upon the industry. The requirement for these types of loans is very tight in comparison to what we discussed earlier.

These loans are only given to individuals with a credit score of at least 700.

In case you don’t meet these criteria, then stronger business credentials will be required to even obtain the loan. The business has to be operating for at least a year and should have a revenue of at least 50,000 dollars.

The Difference

Both kinds of financing options have their perks, but the most prominent difference between them is the gap in payment and level of accessibility.

A merchant cash advance is much more accessible in comparison to a business loan because of the precise conditions and requirements that are tough to meet when applying for a business loan.

The payment terms of a business loan are predetermined, but payments with merchant cash advances are contingent on credit card sales.

The process to apply for a merchant cash advance is much more efficient, this process requires lesser information while the business loans are very thorough in this area.

The number of approvals is higher and the payment is done in terms of sales which is very favorable for a small business.

Why A Merchant Cash Advance Is Beneficial To Your Business

For a small business owner looking for funding, a merchant cash advance is a clear winner.

Terms of repayment are very favorable for the small business owners as he has to pay in consistence with the sale that the business is making.

business funding affect credit score

The chances of the advance getting approved are way higher, require lesser credit score, operating time, and sales requirements. The only point where small business loan takes a lead is the limits of borrowing which can go up to millions while MCAs can only go up to $500,000.

Conclusion – Will Applying For Small Funding Affect Credit Score?

There are multiple ways in which a business can incur debt, this could be small business loans that have been taken in the name of the business, the credit cards that have been issued to the business, overdrafts, and the credit line.

All these do tend to affect your credit score and your business credit score but that depends on some factors.

Three factors determine whether a business loan can affect personal credit. These factors are:

  1. The structure of your business
  2. The type of business loan
  3. How you handle the loan default

Business Structure

The effect on the credit score depends on the kind of structure that your business has

  • Proprietorship Business

If you are a small business owner as a sole trader, the small business loans that you take are most definitely going to affect your credit score because there is no difference between the business credit score and personal credit score in these conditions, these are both the same.

As the owner of the business you are personally liable and hence in case of default, it is your credit rating that will go down.

  • Partnership Business

The same applies to partnership, any small business that is being run by multiple partners is equally liable for the loan and hence non-repayment of it would affect the credit score of all the partners to the business.

  • Limited Company (Corporations)

These types of small businesses are separate legal entities and hence adding a layer of protection to the personal property of the owner.

Shareholders have limited liability, meaning they aren’t liable for the company’s debts.

In this case of the small company is not able to pay the loan back to the bank, it is the credit score of the company that will suffer and not the credit score of the shareholders in the company, although the lenders to the company might ask for the credit details of the directors to the company before granting any loan.

Loan Structure

Before approving the loans, the lenders mostly require some kind of guarantee.

Small businesses mostly use the assets of the business to secure the loan amounts, this move can protect the credit score of the individual as in case of non-repayment, the assets will cover the amount of the loan which is not the ideal situation but will protect the credit score of the individual.

Personal guarantees are standard for start-ups and small businesses that lack sufficient credit history.

Most lenders will also require a personal guarantee if your business is applying for an unsecured loan. Any late payments or defaults your business accrues will have a significant impact on your credit.

How A Business Loan Affects Your Business Credit

The effect of loans for a small business can be both negative and positive. Mostly these loans are taken by small businesses to give a boost to their working capital.

Maintaining a credit history for that is important as that can be a deciding factor for your business.

Whenever your business takes a loan, the lending company will forward the payment history to business credit reporting agencies like:

  • Equifax
  • TransUnion
  • Experian

The entities are responsible for evaluating how worthy of credit your business is.

Poor results of these evaluations mean that the business will face quite some difficulties when securing loans while also affecting the overall credit capacity of the business, which is the amount that the lenders can issue to the business.

In comparison, if your business continues to make repayments and keeps a check on its credit cards, this pattern will depict the fiscal responsibility of the business hence making it more creditworthy.

The trust of the lenders in the ability of your business to repay loans will increase and you will be able to secure loans with much more ease.

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  1. Difference between MCA and Business Loans. (2020, April 3). Retrieved February 14, 2022, from https://www.supervest.com/blog/business-loans-vs-merchant-cash-advance#:~:text=A%20merchant%20cash%20advance%20is,contingent%20on%20credit%20card%20sales.
  2. Berger, A. N., & Frame, W. S. (2007). Small business credit scoring and credit availability. Journal of small business management45(1), 5-22.
  3. Mester, L. J. (1997). What’s the point of credit scoring. Business review3(Sep/Oct), 3-16.
  4. Elyasiani, E., & Goldberg, L. G. (2004). Relationship lending: a survey of the literature. Journal of Economics and Business56(4), 315-330.




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