Does business finance affect my personal credit rating?

Can I get funding for my company without affecting my personal credit?

Business finance can sometimes affect your personal credit rating, the main issue being how your business is structured. Limited company directors benefit from what is known as the “veil of incorporation.”

This legally separates the business’s financial affairs from your personal finances. This means your company has its own credit rating which is completely separate to the credit rating of its individual directors and/or shareholders. Conversely, if you’re a sole trader, you’re already personally responsible for repaying commercial borrowing should the business be unable to pay.

Other instances do exist where business finance can affect your personal credit file, however, even if your business is incorporated. So when can limited company finance negatively impact a director’s personal credit score?

Personal guarantees and business borrowing

Commercial lenders often demand personal guarantees from directors before they’re willing to lend. This is common practice where no assets are available to put forward as security, or sometimes when a business is new.

Providing a personal guarantee brings into play the potential for your personal credit rating to be damaged, however - if your business cannot afford to repay the borrowing and you fail to fulfil the guarantee, the lender can take you to court.

Ultimately, they would have the legal right to force you into bankruptcy, which is why it’s crucial to seek professional advice before you agree to a personal guarantee as you may be able to limit the amount for which you’re liable.

Seeking guidance from a commercial lending specialist may also reveal alternatives to loans where a personal guarantee is required and help you find a more suitable lender or type of borrowing.

Business finance and UK insolvency laws

If your limited company becomes insolvent and cannot continue, the rules of insolvency can also remove the veil of incorporation. If wrongdoing, negligence, or fraudulent activity is uncovered, your personal finances, and subsequently your credit rating, can be affected.

Depending on the nature of the issue, you may become personally liable for some or all of the business’s debts following an Insolvency Service investigation into why the company failed.

Sole traders and business finance

Being a sole trader means that you are the business and your personal credit rating is fundamental to commercial lenders’ decisions. In this case, you won’t be asked to provide a personal guarantee as you’re already personally liable for the borrowing.

If the business failed you’d be expected to repay the lender in full and if unable to do so would face court action and potential bankruptcy. Operating a business as a sole trader carries greater risk to your personal credit rating when borrowing.

How can you protect your personal credit file from your business’s affairs?

• Consider providing a physical business asset as security rather than signing a personal guarantee
• If you’re considering a personal guarantee, approach a specialist for advice
• Be fully aware of how your duties change as the director of an insolvent company

UK Business Finance are experienced business finance brokers and can provide the professional guidance you need. We’ll talk you through your business finance options and explain any potential risks to your personal credit rating. Please get in touch with our expert team to find out more.