Will my business debt show on my personal credit report?
The short answer to this question is that if your business operates as a limited company, all liability is restricted to the business. But if your business operates as a sole trader, your business debt will show on your personal credit report.
Let’s take a more detailed look at what exactly a personal credit report is and under which circumstances business debt will appear on the report.
What is a personal credit report?
A personal credit report is a detailed record of your financial history. Lenders will use the information in the report, which has been compiled by credit referencing agencies, to decide whether or not they are happy to lend you money.
A personal credit report will contain a lot of information that lenders will have to sift through to gain the best picture.
Personal information
All personal credit reports will contain personal information, such as:
- the person’s name and any previous names they’ve used
- address
- date of birth
- employment history
- whether or not they’re registered on the electoral roll
Credit accounts
This part of the report will give details on all the credit a person has had in the past, as well as any current credit. This information will include:
- Types of credit: Credit cards, loans (personal, auto, student), mortgages, and lines of credit.
- Account details: When the account was opened, the credit limit or loan amount, the current balance, and the account status (open or closed).
- Payment history: A record of your payments, including whether they’ve been paid on time, been late, or missed any payments.
Public records
Another piece of information that will be available on the credit report is any public records, such as:
- County court judgments
- Bankruptcies
- Debt relief orders
- Individual voluntary arrangements
Credit enquiries
A personal credit report will also have all credit enquiries, which is a list of all the organisations that have accessed the credit report.
These are classified as either hard enquiries (when credit is applied for) or soft enquiries (when a person checks their own credit report, when a lender checks credit for pre-approved offers, or for administrative purposes). Soft enquiries do not harm a person’s credit score.
Other information that is also included in a personal credit report is any financial associations (joint mortgage or bank accounts), linked addresses and any personal statements explaining certain situations on the credit report.
What is business debt?
So, we’ve discussed what a personal credit report is and the type of information that would be included in it. Now, let’s look at what business debt is and if it will show on a personal credit report.
Business debt is classified as money that businesses owe that has been lent to them for reasons ranging from starting the business to growing the business, and is not used for personal reasons. Examples of business debts include:
- Loans
- Credit facilities
- Trade credit
- Leases
- Invoice financing
- Tax liabilities
- Other liabilities
Circumstances when business debt shows on personal credit reports
There are different circumstances where business debt will appear on a personal credit report. This is dependent on the type of business you are running or certain specific agreements made with the lender.
Personal guarantees
A business will be required to provide a personal guarantee, which legally binds the owner of the business to be personally responsible for repaying the debt if the business can’t do so itself. So, if the business is unable to pay the debts, the lender will be able to pursue the business owner’s personal assets to recover what is owed to them.
Sole proprietorships
There will be no legal distinction between the owner and the business with a business that is registered as a sole proprietorship. This means that a business’s debts are considered as personal debts, which then can be directly linked to a personal credit report.
Co-signing
Even if you’re not the business owner, if you co-sign a business loan or credit agreement for someone else’s business, you’ll have personal responsibility for the debt, too. So, if the primary borrower of the debt is unable to repay the loan, it will become your responsibility to ensure the debt is taken care of. So, this means that the debt will appear on your personal credit report.
Directly obtaining business credit in your own name
Obtaining a business credit card or a small business loan in your own name means that the debt will be directly linked to your personal credit, appearing on your personal credit report, too.
When does business debt not show on personal credit reports?
There are also certain situations where business debt will not show up on your personal credit reports. For example:
Incorporated Businesses (Ltd or PLC) without personal guarantees
If a business is set up as a separate legal entity (like a Limited Company or a Public Limited Company), it will have its own legal identity from its owner.
So, if the business then borrows money in the company’s name, and the lenders do not require a personal guarantee from the directors or the shareholders, the debt will then belong to the company and only appear on the business credit report and not a personal credit report.
Debt held solely by the business entity
If a business incurs debt that is only in the name of the business, having no personal obligation tied to it, the debt will remain separate from a personal credit report.
Building strong business credit
Lenders become more comfortable with lending to businesses that have a proven track record of being able to borrow money responsibly. So, a business that has been able to establish a positive credit history is a lot more likely to secure financing requiring personal guarantees. This way, the business loans or debt will not show on personal credit reports.
Consequences of business loans or debt appearing on a personal credit report
So, what are the consequences of business loans appearing on personal credit reports? Besides a lower credit score, there is also the difficulty in being able to obtain future finances. Let’s take a look at this in more detail.
Lower credit score
Gaining a lower credit score is probably the most concerning part of having business debt appear on a personal credit report because it limits you from being able to:
- Obtain personal loans
- Get a mortgage
- Rent an apartment
- Secure favourable insurance rates
- Get approved for credit cards
Difficulty obtaining future personal loans
Due to having a lower credit score because of a damaged credit report due to business debt, lenders will be more hesitant to lend money, as you’ll be perceived as higher risk. Interest rates will also be higher on personal loans, which means you’ll need to pay more over the loan period.
Further to this, any future employment opportunities will also be affected, as some employers may review credit reports as part of the hiring process. This is especially important in finance or positions that require security clearances.
Legal action and asset seizure
As you may already know, lenders are able to pursue legal action against you to recover the debt if you have business debt appearing on your personal credit report. This may result in seizure of your personal assets, like savings, investments or even your home.
Preventative measures
As always, there are things you can put in place to prevent business debts from showing on your personal credit reports. Let’s take a look at some of these below.
Structure the business as a separate legal entity
The most obvious thing to do is to make sure that you structure your business as a separate legal entity, either by establishing it as a limited company or limited liability partnership, or by establishing your business as a sole trader or partnership.
Avoid personal guarantees
Next, you should always look to avoid personal guarantees. Some lenders may ask you to sign a personal guarantee to say that you will be personally liable for the debt of the business in case the business can’t pay for it.
Always make sure that you read your loan and credit agreements carefully to make sure you know what you’re signing up for.
Build a strong business credit profile
There are many different ways to do this, like:
- Making sure that you pay all your debts on time
- Keep your business information up to date
- Open up a separate bank account from your business’s account
- Make sure your trade references are positive
- Establish business credit accounts
Use business credit for business needs
Whenever possible, use your business credit accounts for business expenses, not personal ones. This helps build the business's creditworthiness independently.
Monitor both personal and business credit reports
Always make sure that you’re monitoring both your business and personal credit reports to ensure that the information on them is accurate.
Creditserve’s credit check packages will help you run credit checks on any company you may be looking to work with. With our services, you’ll be able to assess the risk efficiently, making informed decisions that allow you to mitigate financial risks.
Contact us at 01992 414222 for more information!