Small Business Tips

One Big Factor in Your Small Business Loan’s APR

If you’re looking to grow and expand your business, a small business loan is a great way to do so. Of course these loans aren’t free and so you’ll have to pay a fair amount of interest on the money you borrow. The interest rate and APR (annual percentage rate) you secure will most likely be determined in part by the overall health of the business as assessed by the lender. However another huge factor in how much you pay for your loan is one that entrepreneurs often forget about — your personal credit score.

As a recent post on Inc. explains the APR of your small business loan can be affected greatly by your credit score. In fact more than any other single factor, your personal score could be what causes you to pay the most for a loan. The chart below shows the correlation:

For some entrepreneurs the importance of their personal credit may come as a surprise. After all business credit must trump any personal obligations, right? Inc. points out that it’s really a matter of size; lenders tend to view small business owners and their businesses as one and the same. In their mind an entrepreneur’s ability to manage their own finances says a lot about the creditworthiness of their company.

While your credit score is certainly a big factor, many small business lenders will also look at the health and trajectory of your company. Some incorporate a business credit metric known as FICO SBSS, though this is a fairly new and not yet widespread. Additionally many online lenders like Lending Club and OnDeck have their own algorithms for determining if a business is creditworthy (with the latter boasting a reported 2,000 data points in their assessment). Basically if your credit score leaves something to be desired, it’s worth doing some research to find a lender that will focus more on the business itself and is willing to work with you.

The good news is that now that you know how your personal credit score can affect your business loan APR, you can start taking steps to repair it before applying. Although scores can’t be turned around overnight, understanding how credit scores work and how you can raise them will go a long way. Other than that, keep working hard and make your business the best it can be — lenders will like that too.

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