Many small business owners who are timely with their debt payments may be facing a sign of the times, as some financial institutions may now be poised to add small business debt to the wealth of information reported by credit reporting agencies.

Historically, small business loans have  generally not been reported on the proprietor’s individual consumer credit reports unless they fail to pay on time. But with financial institutions facing rising defaults, Capital One is leading the charge by adding small business loans to borrowers’ consumer credit files, meaning small business owners could soon find that even their timely paid business debts are affecting their personal credit. Any debt that a business owner personally guarantees, including many business loans and credit cards, could be reported.

Loans through the Small Business Association (SBA) require personal guarantees, but many are taken out under an LLC. What small business owners will need to be careful of is that their the credit scores may suddenly adjust dramatically simply due to the ratio of total debt suddenly increasing when business debt is included in the formulation, versus and the amount of available credit being used.

According to a recent article in businessweek.com:

Capital One declined to detail the reasons behind the change or how many borrowers would be affected. One clue may lie in the bank’s growing number of delinquencies—a problem not unique to Capital One, as financial stress causes rising defaults across the economy. In its most recent quarterly report, Capital One noted “a more rapid degradation in our installment loan businesses” that caused higher charge-offs in the business unit that holds loans like Kerr’s. That division’s net income dropped to just $2.4 million in the first quarter, down from $491 million in the first quarter of 2008. The unit also includes Capital One’s U.S. credit card business and other consumer loans, so it’s unclear how small business loans alone are performing, but the segment’s net charge-off rate for the first quarter was 8.39%, up from 5.85% a year earlier, according to the filing. Capital One recorded its first annual loss in 2008, with a net loss of $46 million, compared to net income of $1.57 billion for 2007.

It seems as though consumers are being held liable for the financial hard times the banks are experiencing at every turn, a situation created in large part by the their own inane decisions regarding financing earlier this decade. The ripple affect goes on and on, and sadly, it seems the backlash ultimately ends up in the consumer’s lap.

For more information on structuring your business loans to minimize the potential of this sort of action affecting you, read this blog post.

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