"What's the most important thing I need to get a great loan?"

We hear that question a lot. What part of your business matters most to a bank or lender? Is it revenue? Profitability? Time in business? Industry type? If you could just figure out that all-important answer, you'd be able to secure your dream loan and afford whatever it is that'll transform your small business.

But unfortunately, there's no one single factor. Lenders consider all parts of your business. However...There is an ingredient of your loan application that you might find surprisingly influential. According to Fundera's data, it's a key driver of small business loan APRs. In fact, you might even be a little unsure as to why it matters to lenders in the first place.

That mysterious ingredient? Your very own personal credit score.

A Quick Reminder: APR

Before we explore how and why your personal credit score will affect your small business loans' APRs, let's briefly review what APR is.

APR, or Annual Percentage Rate, is essentially the price you pay for borrowing money. It wraps together a loan's interest rate with all other associated charges, including (but not limited to) origination fees, application fees, underwriting fees, and document preparation fees. It also accounts for the loan's duration--and if you calculate the effective APR, for the compounding of the interest.

Though it can get more complicated, a loan's APR is useful as shorthand for how "expensive" that cash actually is.

So What's the Deal?

Exactly what is the relationship between personal credit and APR?

According to Fundera's quarterly report on trends in eligibility in small business lending, there's a direct--and strong--correlation between the two. In fact, Fundera's data (consisting of around 1,3000 funded loans across a variety of lenders, products, and small business owner demographics) clearly shows that your personal credit score will influence your loan application more than any other single factor.


As you can see, the median APRs of the loan products available to borrowing small business owners decrease as the average credit scores increase. The "best" loans, or those with the lowest APRs, pair up with the highest personal credit scores.

Now, a word on the data before we move on: this graph only proves that there's a very strong correlation between APR and personal credit score. It doesn't show credit score causing the difference in APR. While this might feel like a minor difference, it's important in how you think of your loan eligibility and the small business lending system in general.

Getting Personal

The next question you might want to ask is why? Why does your personal credit score impact your business loan? It sounds like the two should have nothing to do with one another.

And that would be the case--for a big business. But to a lender, a small business owner is his or her business, personal finances and all.

The explanation for this actually makes a lot of sense. Small business owners engage with their businesses very intimately, making most--if not all--of the major decisions that affect whether they succeed or falter. With that in mind, it's sensible for a lender to consider the business owner's personal financial habits and tendencies highly indicative of how they'll act with their business's finances, too.

Your credit score, remember, reflects your creditworthiness... Or in other words, how reliable of a borrower you are. If you pay your loans back on time, in full, and without any problems, you'll have a good score. If you're late, sketchy, or problematic, you'll have a low score--and be assessed as an investment risk accordingly. It's fair to assume that people who unreliably borrow for cars, houses, and credit cards probably won't be the best borrowers as business owners, either. Inversely, a stable and predictable borrower in his or her personal life will probably carry those good habits over into owning a business.

Even asking for a balance sheet follows the same logic: if you've acted responsibly with your spending in the past, then it's easier to believe you'll continue to do so in the future.

But What's Wrong With My Business Credit Score?

Why the focus on your personal credit score instead of your business credit score?

Well, the answer here is fairly simple: small business credit scores just aren't that widespread. Some lenders do incorporate the relatively new FICO SBSS as a metric for creditworthiness--including the Small Business Administration, most notably--but most haven't converted over.

And even so, the FICO SBSS actually incorporates your personal credit score into its small business score... There's just no escaping the impact your personal credit will have on your ability to get a small business loan.

Knowing is Half the Battle

Now you know that your personal credit score affects what you'll be paying for your small business loans--so what?

If you're already following best practices for maintaining a stellar personal credit, then there's not much else for you to do.

Unfortunately, far too many small business owners don't realize that their personal spending habits will influence how their businesses live, breathe, and grow. If you weren't aware, then make sure to take charge of your personal credit right away--it's an investment into your business's future.

Published on: Dec 21, 2015
The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.