Did you know that personal finances impact business funding options? It’s a common concern for young and small companies, as it can affect whether you qualify at all and the total cost of borrowing if you do. We’ll walk you through the mechanics and alternative options when securing funding below.
Why SME Funding Strategies Often Involve Personal Credit Checks
Traditional lenders want enough information to judge how likely you are to repay. Established companies can point to years of financial statements and a well-developed business credit profile. If your company is new or smaller, there’s a good chance it doesn’t have sufficient history yet.
In these cases, lenders typically review the owner’s personal financial history for additional context, which means your personal finances can ultimately affect risk assessment, funding approval, and the terms offered.
4 Ways Personal Finances Impact Business Funding
When we say “personal credit impact,” most people jump straight to credit scores. They are part of the overall picture that lenders care about, but it’s not the only consideration.
1. Credit Scores
Traditional lenders, such as banks and credit unions, typically require a minimum personal credit score of 650, Experian reports. Many require a personal credit score of 680 or more. You’ll see the same requirements for SBA loans as well.
It’s important to note that these are minimums to qualify. Even if you do meet a lender’s minimum, you’ll still likely pay more in fees and interest for having a lower score. For instance, someone with a top credit score could get a loan with an interest rate as low as six percent. Even if you’re still in the excellent range, but at the lower end, you might be looking at closer to 14 percent. When you translate those figures into a $100,000 loan over five years, the six percent interest creates $15,997 in interest charges over the lifetime of the loan, while the 14 percent results in $39,610 in interest charges.
But bear in mind, if you don’t meet the credit score criteria and are pushed to online lenders, APRs routinely hit 30 percent or more. That’s $94,120 in total financing costs!
Personal Credit Score Tiers
| Score | Status | Summary |
|---|---|---|
| 740+ | Very Good/ Excellent | Supports access to the most competitive rates and terms from traditional lenders. |
| 670 – 739 | Good | Meets the typical minimum for many traditional lenders, with stronger offers toward the upper end of the range. |
| 580 – 669 | Fair | Flexible-credit lenders may approve you, generally with higher rates, fees, or collateral requirements. |
| Under 580 | Poor | Available options tend to rely more heavily on revenue, collateral, or receivables and often carry higher costs. |
2. Personal Guarantees
If your business needs more funding than its assets, cash flow, or financial record can support, lenders may sometimes be willing to use a personal guarantee to close the gap. Personal guarantees in lending simply state that you, personally, accept responsibility for the balance even if your company can’t pay it.
It’s a common solution. Of firms with debt, 59 percent used a personal guarantee to secure it, per the latest Small Business Credit Survey (SBCS). However, lenders can’t offer this solution to everyone, as income, assets, debts, and credit history help determine the strength of a personal guarantee and may influence the lender’s decision.
3. Debt-to-Income Ratio
Your debt-to-income (DTI) ratio shows how much of your gross monthly income goes toward recurring debt payments.
When your personal finances support a business funding application, lenders may use this figure to assess how much room your budget has for another financial obligation. A higher DTI may result in a smaller approval, different terms, or a denial because more of your income is already committed each month.
It’s worth noting that 35 percent of small business loan applicants receive only partial funding, per the SBCS. DTI is a common factor.
Debt-to-Income Ratio Formula and Calculation
To calculate your DTI, divide your recurring monthly debt payments by your gross monthly income and multiply by 100.
(Monthly Debt Payments ÷ Gross Monthly Income) x 100 = Debt-to-Income Ratio
For example, if you earn $6,000 per month before taxes and pay $2,100 toward your debts, your formula is ($2,100 ÷ $6,000) x 100 = 35. Your DTI is 35 percent.
Debt-to-Income Ratio Tiers
| Ratio | Status | Summary |
|---|---|---|
| 35% or Less | Good | A DTI of 35% or less is typically viewed as favorable by lenders. This usually signals you have money left over after paying your debts. |
| 36% to 49% | Challenged | You may have trouble qualifying for loans with a DTI of 36% to 49% because lenders often worry you won’t be able to manage additional debt if unforeseen expenses occur. |
| 50% or More | Needs Attention | Your borrowing options are typically limited when your DTI is 50% or more because you likely have little money left after bills, which limits your ability to save, spend, and cover unforeseen expenses. |
4. Mixed Assets and Liabilities
More than a quarter of small business owners don’t have a separate account for their company, the Hartford Business Journal reports. Further, when the definition of commingling funds is expanded to skipping paychecks, nearly two-thirds do it, per Small Business Expo surveys. Although it may seem natural to combine funds, particularly in the early days with self-funded companies, this presents several challenges when you seek business financing.
First, it can be very difficult to trace what money belongs to the business and what belongs to the owner. This can complicate everything from taxes to calculating revenue and DTI.
Secondly, it can undermine the protections afforded to you by your business’s legal structure. Normally, when a business incorporates or organizes as an LLC, a clean line between the business owner’s assets and the business assets is drawn. The owner’s assets are protected from business issues, such as unpaid debts. However, when there’s evidence to suggest the company is nothing more than a shell or a separate name under which the business owner operates, courts may sometimes “pierce the corporate veil” and allow a plaintiff to recover directly from the company owner.
Although veil-piercing claims are relatively uncommon, this was the case for the owner of an Iowa corporation, who was personally held liable for a $410,067 debt, per Iowa State University. Here in Texas, a plaintiff generally must show that the owner used the company to perpetrate actual fraud primarily for the owner’s direct personal benefit, as Kraus Law notes. This reduces the likelihood of a case moving forward even more, but it doesn’t change the fact that commingling funds blurs lines and liability.
These factors can make lenders wary of providing any level of funds.
Strategies to Improve Personal Finances and Secure Traditional Business Funding
If you went through the list and spotted potential trouble areas or aren’t sure where you sit, the following steps can help you strengthen your financials before you apply for funding.
Separate Your Personal and Business Funds
Open dedicated business checking and savings accounts, and route all company income and expenses through them. Use a business credit card for company purchases as well. If you contribute personal funds, record the transaction as an owner contribution or loan. This creates a clean paper trail for lenders and makes revenue, expenses, and cash flow easier to verify.
Form an LLC or Corporation
Establishing an LLC or corporation creates a formal separation between you and your company. Work with an attorney or accountant to choose the appropriate structure, then use your company name and employer identification number on accounts, contracts, invoices, and tax documents. Following these formalities also helps you preserve the personal asset protections discussed above.
Pay Down Personal Debts
Calculate your DTI, then prioritize debts that consume the largest share of your monthly income. Focus on balances whose payoff will eliminate or substantially reduce a required payment. Paying down revolving balances, such as credit cards, may also lower your credit utilization and improve your credit score.
Improve Your Personal Credit
Review your reports from Experian, Equifax, and TransUnion. Correct errors, bring overdue accounts current, make every payment on time, and keep credit card balances low. It’s also helpful to limit new accounts and hard inquiries in the months leading up to your funding application.
Build Your Business Credit Profile
Pay business credit cards, vendor accounts, and other company obligations early or on time, and confirm that creditors report your activity to commercial credit bureaus to build your business credit. Keep your bookkeeping and tax filings current as well. A stronger business record gives lenders more company-specific information to evaluate and can reduce their reliance on your personal finances.
Maintain Strong Cash Reserves
Retain enough cash in your personal and business accounts to manage regular expenses and unexpected costs. Plan owner withdrawals carefully, set aside funds for taxes, and avoid overdrafts. Lenders often review recent account statements, so steady balances and available reserves can strengthen the overall application.
Alternative Funding Options for SMEs That Have Easier Credit Evaluations or More Relaxed Funding Criteria
When personal credit makes traditional financing difficult, you still have options. Each weighs your credit score, funding needs, available assets, and repayment capacity differently, so start with what your company needs the money for and what it can use to support the request.
Secured Business Loans
Secured business loans use assets such as inventory, equipment, real estate, or cash as collateral. This may help offset concerns about your personal credit and support a larger approval. However, lenders will still review your credit and cash flow, and they may seize the pledged assets if your company can’t repay the balance.
Equipment Financing
If you need machinery, vehicles, computers, or other equipment, the equipment itself serves as collateral for the financing. This often makes equipment financing easier to qualify for than an unsecured loan. The tradeoff is that the funds can only be used for the equipment, and you’ll make scheduled payments until the balance is cleared.
Purchase Order Financing
Purchase order (PO) financing may help when you have a confirmed customer order but need money to pay the supplier that will fulfill it. Approval for PO financing focuses heavily on the transaction, including your customer’s ability to pay, the supplier’s ability to deliver, and your profit margin. It’s primarily available to companies that sell physical goods.
Business Grants
Grants generally don’t involve personal credit checks or repayment. However, they’re highly competitive, often restricted to specific industries or uses, and may take months to secure. This makes them better suited to planned projects than immediate needs such as payroll or supplier payments.
Invoice Factoring
If your company issues B2B invoices, invoice factoring, also known as accounts receivable factoring, is often the better solution. You sell unpaid invoices for work or goods you’ve already delivered, and approval focuses primarily on your customers’ creditworthiness rather than your personal credit. You can use small business factoring funds for any business expense, and the amount available grows alongside your sales.
Get the Funding You Need Based on Your Customers’ Creditworthiness, Not Yours
At Charter Capital, you may qualify for advances of up to 98 percent of the invoice value, with same-day funding available once your account is established. Most clients qualify for rates between one and three percent, and there are no long-term contracts or minimum monthly volume requirements. To see how much funding your invoices can provide, request a complimentary quote.
DISCLAIMER: This article is not intended to provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.
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