Regardless of how strong your business plan is, how open the market is for your product or the amount of buzz in the marketplace over your concept, often those are not the deciding factors in your getting capital from a lender. The banker will want to see your business plan and they will ask all the right questions about the marketplace, competition and your marketing plan, but the one thing that pretty much guarantees whether you get the loan is what is on your personal credit file.

When you go to the bank to borrow capital, the bank is not lending your company the money; at least not in the early years. They are lending you the money, based on your credit history and your guarantee that payments will be made. This means that your personal credit file just became very important to the future of your company.

Because the bank knows that in a small business, the company’s ability to pay is often tied to you, the owner, the banks feel it is only fair that they be able to hold you responsible should the company not pay its bills. Because of this, practically any loan your company takes out in the early years, whether for a small business loan, a company credit card or just trade credit with a supplier will require your personal guarantee.

A personal guarantee means that, should the company not pay, pay late or go under, you agree to make the payments instead. Depending upon the exact terms of the agreement, the lender can require you to bring the payments current or even, in extreme cases, require you to pay the debt in full.

Yes, there are cases where a bank does not require a personal guarantee on a business loan, but such agreements are done on a case by case basis and nearly always involve your attorney negotiating on your behalf. In general, expect that to borrow any money will require the signature (and guarantee) of one of your businesses officers.

Luckily, over time, your business will build its own credit profile with the big business credit databases such as Dunn and Bradstreet and Experian business, so your personal credit history will eventually become less important, but in those critical early years your personal credit is vitally important to the health of your business.

While it is easy to se the impact your personal credit report can have on your business and its ability to borrow money, what might not be so obvious is how your business’s financial dealings can impact your personal credit profile.

When you are signed as guarantor on a business loan, the lender will most likely report the status of the loan on your personal credit report, in addition to any business databases they report it to. This leads to a “mingling” of your business and personal data and, depending upon the health of the business, the impact this can have on your personal credit can be catastrophic.

When you want to borrow money, one item any lender is going to look at is what is known as your “debt to income ratio”. This is simply the amount of debt you already have in relation to the amount of income you are reporting. The problem comes when your business carries a large amount of debt (which would be reported to the credit bureau on your personal file) that is included with your personal debt when factoring your debt to income ratio. However, the income the business is going to use to pay off that loan is not reported on your personal credit file, so your debt to income ratio is now severely off-balance. Unless you can explain it away to the satisfaction of the loan officer, it can severely impact your ability to personally borrow money.

As a small business owner, sometimes cash crunches happen and it becomes necessary to stretch out payments. Unfortunately, this too can harm your personal credit report. The reason is because another factor considered by lenders is how timely your payments are on your existing loans. Since your business credit is now reported to your personal credit file, any late payments by your company now show up as your late payments, again hurting your personal credit score and harming your ability to borrow.

In order to preserve your borrowing power, do everything you can to pay all your accounts on time, both business and personal. Be judicious about your use of credit, being careful to not overextend yourself. Remember, it is not just your business’s credit line you are playing with; it is yours.

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