When the pressure mounts in your personal life, it’s tempting to use a business loan to clear your debts. But is that a good idea?
As a business owner, you’re juggling all sorts of financial obligations. You have employees and stock to consider. Your taxes have to be correct and you need to manage your business cash flow.
That’s enough stress on its own.
But then you factor in your personal life. You likely have a mortgage and living expenses to deal with. Perhaps you even have other debts that are starting to get on top of you.
That’s when the temptation strikes.
You start asking yourself: “Can a business loan be used for personal expenses?”
The trouble is that this is a bit of a grey area. You could end up on thin ice if you use unsecured business loans for personal reasons. It depends on how you’ve set up your business.
This article examines what you can and can’t do with your business loans on a personal level.
It Comes Down to Your Business Structure
When you created your business, you had to choose a structure for it. Your options included:
- Sole Trader
You may not have considered unsecured business loans when making your decision. For example, you may have set up as a Sole Trader because you have no employees. Or you may have set up as a company to protect your personal assets from business liabilities.
Basically, your structure determines if you can use a business loan for personal expenses.
We’re going to focus on the company and sole trader structures in this article.
How Does Registering as a Company Affect You?
The facts are simple. If you structure your business as a company you can’t use a business loan for personal expenses.
The same goes for business credit cards and other lines of credit.
Here’s how it works.
When you set up a company, you create a new legal entity. That means it’s completely separate from you as a person.
As a director or owner of the company, you pay yourself a salary. However, you can’t just withdraw funds from a company bank account for personal use. You have to use that money for the business. The money the business takes in belongs to the corporation – the legal entity you created – not you.
How does this affect you when you ask for a business loan?
When a lender approves your business loan, they do so based on the case you made for the company. You’re borrowing money for the legal entity you created, rather than yourself. That money goes into the company bank account, which makes it the property of the business.
Now, you may be able to use that money to pay your salary. But you can’t just take it out of the business to pay for your personal expenses.
Think of it as taking money from another person to pay your debts. It’s simply not a legal use of the money you’ve borrowed.
What About Company Credit Cards?
The same goes for your company credit cards.
If you charge a personal expense to your company card, you’re not keeping a proper separation between yourself and the business.
You might even find yourself personally liable for money the business owes. The courts may decide business creditors can use your personal assets to pay off company debts.
You miss out on one of the main benefits of creating the company structure in the first place.
Beyond this, you create tax issues due to this mingling of business and personal. You’re also raising doubts about how your business uses its funds.
Finally, using your company credit card may impact both your personal and business credit scores. You may find it more difficult to get an unsecured business loan in the future if you’re charging a lot of personal expenses to the card.
How Does Registering as a Sole Trader Affect You?
You may get some happy news here.
It’s possible for you to use a business loan for personal expenses if you’re a sole trader.
There’s a reason for this. Sole traders don’t have to set up a separate legal entity when creating their businesses. They don’t even need to create a business bank account if they don’t want to.
That means you’re free to use a business loan for personal expenses from a legal standpoint. It’s important to speak to your lender about this. They may take issue if you applied for the loan for one specific reason and then use it for another.
Here’s the key thing to remember. Any money you take from the business becomes taxable income for you personally. So if you use $5,000 of a loan for personal expenses, you have to declare that as income on your personal taxes.
Again, this can muddy the waters a little bit.
You don’t have to worry about exposing your personal assets by using this money. As a sole trader, that’s something you’re already doing.
You’re Navigating Murky Waters
So, can a business loan be used for personal debts and expenses?
It can if you’re a sole trader, but not if your business has a company structure. Corporations are separate legal entities and you need to treat them as such.
Even as a sole trader, you’re navigating some pretty murky waters. You’re legally able to use any money that comes into the business for personal expenses. But you may face issues with your lender if you’ve told them you need the money for something else.
The safest bet is always to keep your business and personal finances separate. This ensures you’ll face no legal issues. Plus it makes managing your finances easier.
It may be best to go with a personal loan for your own needs. But if you need an unsecured business loan, we can help you.
Apply online today. It only takes five minutes and you’ll receive a quick response to your application.