The Importance of Personal Credit in the Commercial Lending Process

Fortune 500 companies borrow capital on the strength of their balance sheet and profit and loss statements. Their Officers and Directors, while having a fiduciary duty to the stockholders, typically are not personally obligated on their company’s borrowings. This is known as non-recourse lending. Such is not the case for small and medium sized businesses. The ability of smaller companies to borrow usually rests with the financial strength of the owners and the quality of their personal credit. Small business

Most traditional commercial lenders will look at the net worth, liquidity and make-up of the owner’s personal assets as a fall back, should things not go as planned with the business. In addition, lenders will assess personal credit quality primarily through the credit scores from each of the three major credit reporting agencies, Experian, Equifax and Trans Union. These scores are more than just a number to the lender. They provide an assessment of how well the owners can manage their personal finances and protect the personal asset base they have accumulated. Low credit scores are a red flag to lenders-many have minimum score requirements even to consider credit applications. Lenders naturally question how you will be able to manage and operate a business if you are unable to manage your personal finances. Achieving strong credit scores requires consistently paying your financial obligations in a timely fashion, as per the terms and conditions of the promissory note.

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