Agribusinesses Loans: Why Personal Credit Matters to Lenders

Whether your goals are to buy equipment for your farm or to create an agricultural product that could change the world, if you haven’t applied for agricultural loans, or “ag loans,” before, you may be surprised to learn that lenders don’t just consider your business plan and ideas—they take a close look at your personal credit, too. In fact, it’s one of the most important considerations for loan approval.

Here’s what matters to lenders when they review your personal credit and how to get yours ready for financing.

Why personal credit matters

Think of personal credit as a financial report card. It shows lenders how well you manage money and repay debt in your personal life. This matters because from a lender’s perspective, how you handle your personal finances often reflects how you may handle business finances. A strong personal credit history–one that demonstrates responsible repayment for different types of debt, such as credit cards, car loans, and a mortgage, for example–often results in more business loan options and better rates and terms.

However, even a person with a strong personal credit history may not meet all of the approval criteria for a farm loan from a bank, while a specialized small business lender may be able to approve loans for people with less credit-than-perfect credit and/or a very limited personal credit history. This is true for community development financial institutions, or CDFIs, like HVADC, that have more flexibility.

CDFIs can often approve loans when banks aren’t able to because it’s their mission to help small business owners in their geographic regions and/or industries who otherwise can’t get business financing from conventional lenders. That’s why, as you explore loan options, it’s always worthwhile to have a conversation with a CDFI about your business’s funding needs.

How lenders use personal credit for business loan decisions

Personal credit is important for small business owners who need smaller loans and/or haven’t yet established a business credit history. It helps lenders determine creditworthiness, meaning that a borrower has demonstrated good financial management in the past.

Before you apply for a business loan, it’s important to review your personal credit report, which is available to you at no charge. This gives you the opportunity to see the information that a potential lender will review when they request your credit profile. You can also address any issues, or have mistakes corrected.

When you apply for a business loan, a lender will consider some or all of the following elements of your personal credit and finances (and possibly others), although different lenders may give different weight to each factor.

• Credit score: Credit scores, also referred to as FICO scores, range from about 400 to 850. They can change often, up or down, over time. A higher credit score can help you qualify for more loans and better terms, including lower interest rates and longer repayment periods, but there are good loan options for people with imperfect credit, too.


  
  

• Credit history: This includes open and closed accounts and payment history for car loans, personal loans, mortgages, and credit cards. It includes information about whether you pay on time and if you’ve had past challenges, like a judgment or bankruptcy.


  
  

• Debt-to-income ratio. This shows how much you owe compared to how much you earn. Most lenders prefer that your total monthly debt payments aren’t more than 30-35% of your monthly income so that you have money left over for living expenses and don’t take on more debt than you can handle. This means that if you have $5,000 of personal income each month, your total debt isn’t more than $1,500-$1,750.


  
  

• Available collateral. Collateral, such as a car, can help you secure loans. Even though these are items that you bought personally, they may have to be pledged to cover some of the collateral requirements for a business loan to be approved.

  
  

The link between personal credit and business credit

For new businesses, personal and business credit are intertwined because the owner is personally responsible for the business's debts and success. In addition, the owner and the business are often financially linked through the type of business entity established, such as a sole proprietorship or a sole-owner limited liability company (LLC). For this reason, from a lender’s perspective, you truly are your business.

After your business is established and operating for a time, you can begin to establish a business credit history through business loans and lines of credit and vendor accounts, for example. However, for most small businesses in need of a loan or other credit, lenders will probably still review your personal credit history as part of your application.

Simple steps to boost your personal credit

Personal credit is a key that can unlock financing options and improving your credit is something you can start right away. It can take several months for your credit history to reflect your hard work, though, so be patient and consistent.

Here are proven strategies:

• Make every payment on time. Your payment history has the biggest impact on your credit score. If you consistently pay your personal bills on time and manage your debts well, lenders will view you and your business as good investments.

  Tip: Set up automatic payments for your bills to ensure you never miss a due date.


• Keep your credit card balances low. High credit card balances can lower your credit score by increasing a factor that’s called the credit-utilization ratio. That’s the amount of credit you’re using compared to the total available credit you have.



  Tip: Try to use less than 30% of your available credit. For example, if you have a total credit limit of $10,000, aim to keep your balance below $3,000.


  
  

• Review your credit report regularly. Mistakes happen and errors on your credit report can unfairly lower your score. Get your free credit report annually from each major credit bureau (Equifax, Experian, and TransUnion) through AnnualCreditReport.com and ask to have any mistakes corrected.



  Tip: Credit monitoring services, like Credit Karma, can help you track your score and give you tips to improve. In addition, checking your score through these won't hurt your credit.


  
  

• Be strategic with credit accounts. If you're new to credit or working to rebuild your score, consider a secured credit card or credit-builder loan. These can help you establish a positive credit history when used responsibly. You can also ask vendors that you regularly pay, like your cell-phone service provider or landlord, if they’ll report your excellent payment history to the credit bureaus.



  Tip: Keep credit card accounts open, even if you don’t use them. This can help your credit score by maintaining a longer credit history and improving your credit utilization ratio. Just be careful about opening too many new accounts at once, as this can temporarily lower your score.

  
  

If you’ve had past credit issues, here's another important tip: Online applications don't give you a chance to explain past issues, such as an illness or divorce, which could have impacted your credit. Instead, have a conversation directly with a lender that specializes in helping small agribusinesses. When you talk with these lenders, including community development financial institutions (CDFIs) like HVADC, you’ll find that many are willing to listen to your story and consider the bigger picture of who you are and your business goals.

Resources to help you succeed

While the first steps to loan preparation are to review your credit report and score, as you move forward, keep in mind that there are additional services that can help:

• Your local Small Business Development Center (SBDC) or SCORE office can provide guidance and workshops on business financing, including improving your personal credit.


  
  

• HVADC offers guidance and training to help you build or rebuild your credit and get ready for agribusiness loans. Its services are available at no cost to eligible agribusinesses in New York State’s Hudson Valley region.


  
  

• Non-profit organizations that work with local banks or credit unions can help you improve your credit history. Just be careful about hiring for-profit debt-settlement companies that may not have your best interests in mind.

  
  

Take control of your financial future

By understanding how lenders view your personal credit and taking steps to improve it, you're not just working on your personal finances—you're investing in your business's future success. When the time comes to apply for an agribusiness or farm loan, you'll be glad you did.

To learn more about loans, training, grants, and other services for Hudson Valley agribusinesses, contact HVADC today.