Since its introduction to the major credit bureaus in the early ‘90s, banks and other creditors have used the FICO score to evaluate a borrower’s creditworthiness for everything from auto loans, home mortgages, credit cards, and small-business loans.
Yes, your personal credit score, or FICO score, might not be the best measure of whether or not your business will successfully repay a business loan, but in tandem with some other metrics, it does help a lender answer three very important questions:
- Can your business repay a loan? Lenders will look at your business’s revenue and cash flow to see if you can afford the debt.
- Will your business repay a loan? Your FICO score plays a role here. A lender will look at your personal credit history to try to determine if you’re the type of borrower who typically meets his or her financial obligations. If you’ve consistently done so in the past (in both your personal and professional life), a lender can have a reasonable expectation that you will continue to do so in the future.
- Will your business make each and every loan payment? Your FICO score plays into this question too. Lenders are trying to determine what you’ll do in the future based on what you’ve done in the past. They’ll look at both your business credit profile and your personal FICO score to make that determination. The thought is if you make all your loan payments regarding your personal credit obligations, you will likely do the same with your business obligations.
There are circumstances where a business owner with a weak personal credit profile might still be able to successfully make loan payments. But over the years, lenders have seen a correlation between how a borrower meets their personal obligations and how they meet their business obligations. So as a small-business owner, you should assume that your personal credit score, or FICO score, will always be part of the equation.