Correlation Between Personal Guarantee And Your Credit Score

Personal guarantee is a promise made by an entrepreneur to personally repay company debts if the business defaults. It is a way for banks to protect themselves, while reflecting the seriousness of the business owner to repay debts.  Without a personal guarantee, they are thought to not believe in their business and are high risk.  Small business owners don’t want to provide a personal guarantee if possible.  Even if they are diligent about repaying debts, some unforeseen catastrophe may happen preventing a loan payment.  Then the bank seizes personal assets. 

Using personal money and assets for financing involves a risk in damaging personal credit because the credit score reflects every time a financing inquiry occurs.  The more business credit is personally guaranteed, the less likelihood of getting any future credit for personal use. 

Banks might be willing to waive the necessity of a personal guarantee if they have the assurance that a business can stand on its own.  They need to see history of excellent business credit, continued growing and increased revenue.

Regardless of personal credit history, the goal is to limit use of a guarantee, to build business credit, to no longer use personal credit, to limit personal liability, and to protect personal assets from any business losses.  Business credit provides greater access to company purchasing and lower interest rates on loans, therefore saving money.

To get good business credit without personal guarantee, a company must register with all three business credit reporting agencies, find vendors, suppliers and credit card companies to give some credit for the business without using a personal credit score.  They must ensure all business payments are reported to the credit bureaus so they can track keep track. The goal would be to attain a minimum of 75 rating in credit, and minimum 630 FICO score, based on payment history and trade references. Apply for 3 to 5 retail business credit cards that don’t require a personal guarantee. 

Lenders look for current payment history, D & B rating, years in business, trade and banking references, aging receivables, business tax returns and sometimes owner/office credit score.