The reporting of SBA loans has been a much searched-for topic among business owners, especially in recent months.
More small businesses than ever have received economic support through the SBA and taken advantage of programs such as the Paycheck Protection Program (PPP), Economic Injury Disaster Loans, and traditional 7(a) loans.
So it is natural that this has become a widely discussed topic and concern among business owners and lenders.
In SBA guidelines, reporting SBA loans to credit reporting agencies is included.
According to SBA Standard Operating Procedure 50 57 (SOP 50 57) and under the Debt Collection Improvement Act of 1996, lenders are required to report information to the appropriate credit reporting agencies whenever they extend credit with an SBA loan.
They should also consistently report information regarding servicing, liquidation, and charge-off activities during the life-cycle of the loan. But this is reported by the lender to commercial credit reporting agencies, not personal ones.
Although normally a borrower must personally guarantee the loan, it’s not reflected on a personal credit report. It is still unclear what the responsibilities are for reporting PPP loans.
What do lenders need to report?
The lender must report borrowers of SBA-guaranteed loans to commercial credit reporting agencies. However, they do not need to report on the guarantors of SBA loans.
Lenders report the name, address, and TIN of the borrower, as well as the amount, status, and history of the debt, and also the agency or program under which the debt occurred.
As well as being required by law, lenders need to report the transactional history of SBA loans to commercial reporting agencies because it gives notice to other creditors owed by a small business.
This lets other lending firms and institutions know a business’s total existing debt. Furthermore, the SBA has noted that business owners who are more conscious of their credit are more likely to pay on their accounts if they know their history will be passed onto credit agencies.
Where does the lender report to?
The lender must report to at least one commercial credit bureau reporting agency. There are many agencies out there and each of them has preferred reporting resources.
Three of the most reputable credit reporting agencies are Dun and Bradstreet (D&B), Equifax Small Business Enterprise, and Experian SmartBusinessReports™. These agencies provide accurate, timely, and thorough information.
When does the lender report?
Lenders report to credit reporting agencies when an SBA loan is disbursed and every quarter thereafter. Reporting is required for the entire life-cycle of the loan via charge-off activities.
But it is important to remember that SBA loan reporting to credit bureaus is not a consistent or universal practice.
This is because it is not required by regulators that banks report other non-SBA commercial credit to credit reporting agencies, so a lot of community lending institutions don’t have a mechanism in place to report commercial loans, and that includes SBA loans.
Due to this not being a required or common practice, many lenders do not know that this is in the SBA’s guidelines. This is in contrast to consumer credit reporting that is required and reported regularly.
The main consequence of this would be a lender being audited by the SBA. Not reporting SBA loans will be recorded as a finding of the audit, and this is basically citing an infraction.
This doesn’t necessarily mean the guarantee is at risk. But lenders who have not been reporting to SBA loans to credit bureaus should start doing so immediately.
How do I keep business debts off my personal credit report?
Funding is undoubtedly one of the toughest aspects of starting a business, with a lot of obstacles to navigate. It’s far too easy for the line between business credit and personal credit to blur.
When you start to set up your business accounts, it is important to understand your business financing options and how they may affect you. Below, you’ll find some tips on how to distinguish your business credit from your personal credit score.
The type of business you have and you acquire credit (such as a business loan or credit card) may impact your personal credit score. Personally guaranteeing a business account in any capacity can impact your personal credit.
Let’s take a closer look at how business loans and business credit cards may affect your personal credit score.
Business Loans: Usually, small business loans are guaranteed by an individual. This means that you, as the sole proprietor or partner in the company, agreed to pay the debt. The lender can then seek to collect payments from you personally if your business is unable to pay back the loan.
This also makes you effectively a cosigner, and this means the debt can be reported on your personal credit report. If you personally guaranteed a business line of credit, this can similarly impact your credit history.
Personal loans used to fund your business will also affect your personal credit score, and this includes home equity loans too.
Business Credit Cards: Many businesses have business credit cards to manage their cash flow and increase working capital. But information related to a business credit card account showing up on your personal credit report will depend on how the account is set up.
If you are an employee of a corporation and the company gives you a business credit card for work expenses, it’s unlikely this card will be listed on your credit report. This is because you are just an authorized business user of the card.
However, small business owners with their own cards are more than authorized users. They are usually personally guaranteeing the account which makes it more likely for business credit cards to show up on their reports and affect their scores.
It’s important to make sure you are personally guaranteeing that account before signing up for a business credit card. If you use a personal credit card for business expenses, then these payments will also appear on your report and affect your score.
But now let’s take a look at some strategies of how you can keep your business credit score and personal credit history separate.
Choose the correct business structure: If you are a sole proprietor of a business, there will be little to no separation between your business and your personal credit.
But choosing a company structure such as an LLC, S Corp. or C Corp. may help to separate business and personal finance. To find out more, we recommend speaking to a business organization lawyer or CPA to find out what your options are.
Consult with your lender: It may be worth asking lenders to check your personal credit reports for a business loan or payment plan. However, this may be difficult information to get and in turn affect your scores.
Before you commit to any financing offers, you should also inquire about the lender’s policy for reporting loans. Read contracts carefully to check whether or not they are requesting a personal loan guarantee.
Remember, if you sign anything with your name rather than the name of the business, you could personally be held liable for the terms of the contract.
Choose the right business credit card: There are some business credit cards out there that don’t consistently report activity to consumer credit reporting agencies.
However, this only applies when payments are made on time. Every small business credit card will report if you default on the card.
Personal debt impacting business loans
If you have personal debt or a low personal credit score, this could hinder your prospects for a business loan. This will depend on if your business has a score of its own and what type of company organization you are.
Some lenders may only be interested in your business credit score or history. As we have mentioned above, this is usually reported by the three major business credit card bureaus (Experian, Equifax, and D&B).
Meanwhile, with working capital loans, the lender is more concerned with the historical health of your revenue streams and balance sheets rather than your credit score.
Loans you take out for business purposes could be influenced partially by your personal credit. If you are taking out a personal loan (like a home equity line of credit) to help cover your business expenses, then your personal credit is important.
But even if you are only applying for a business loan, your personal credit history may play a part if your business is new and doesn’t have its own history or successful revenue stream to look to.