Owing to the popularity of a private limited and limited form of business organization it is likely that you understand yourself and your business different from each other. So, in the same line, you would think that there shouldn’t be any connection between your personal finance and business loan. This thought process is right only to some extent. There are situations where information regarding personal finance is also assessed to ascertain whether to advance business loan to you or your business, or not.
In case you have a sole proprietorship business than, there is no separate identity of you and your business. Which basically means that you and your business are considered to be one and the same party there is no legal distinction between the two. In this case, if you apply for a business loan than your personal credit records will be scrutinized. This is a disadvantage with a sole proprietorship business where the future of business is directly associated with the owner’s personal credit history.
This means that in case you already have a personal debt, the chances of bank or NBFC advancing you a business loan becomes slim. Also, your poor credit history will result in high-interest-rate being levied on your loan. Your debt to income ratio needs to be low in order to make a good chance at your business loan application being accepted and a competitive rate being offered.
Debt to Income Ratio
The decision to advance a loan or not is greatly dependent on the income you earn. If the lending institution ( Bank or NBFCs) feels that your present income is enough to take the pressure of loan or monthly EMI then it is likely that you will get the loan. This will be looked along with any existing loan you are servicing in a personal capacity.
Debt to income ratio is basically a calculation of the portion of income spent by the individual on paying the monthly debt dues. If this portion is exceeding half of your income than it is flagged dangerous by the lending institutions. Around 35 percent is the mark where it is acceptable.
Even when the business is LLP or private limited, personal credit records can be asked. This is the case when the business has very little financial transactions to show or may be applying for the first time. Therefore, the lending institutions will not have enough records or detail to take their decision on. These cases are called thin files and the bank or NBFC calls for personal records of promoters so that they can get enough information on their hands to analyze and take its decision.
Late and Missed Payments
Late and missed payments of EMI and existing credit card balance impacts credit history adversely. Even one day’s or less will be reflected as late payments in the credit history. Few rare late payments do not cost much but the regular habit of this will cost your credit score along with penalty or late fee.
While regular late payment puts an adverse effect on your credit history, having missed even a single payment has even more adverse bearing on your credit history than a few late payments.
The above-discussed scenarios reflect how and when your personal credit can impact your business loan approval. Apart from these circumstances, if you have ever filed for bankruptcy than your road gets even more difficult. Bankruptcy is reflected for 10 years in the personal credit history.