In this article we’ll take a look at why taking out that personal loan might seem inviting – and why the inherent risks of doing so may well outweigh the short-term benefits.
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When you’re running a business, it can feel like your personal and business life are one and the same. So when cash is tight and capital is low, taking out a personal loan for business to fund your next stage of growth might seem like a sensible idea. But there are many reasons why taking out a loan against your own personal assets and liabilities could be a risky move.
Taking out a personal loan for business purposes may seem like an obvious step. After all, you own the business and no doubt want to make sure the company is well-funded and has the capital to meet your key strategic goals for the year ahead.
However, it’s crucial to understand the risks you may be entering into by using your personal loan to finance the key funding of your business.
A personal loan is taken out when you (as an individual) apply to borrow money from your bank or lender. In essence, you’re borrowing money as an individual legal entity, and the liability for this loan and associated debt is yours and yours alone.
A personal loan is:
A business loan is taken out by a company or partnership and is guaranteed against the assets of the business, NOT the individual. The liability for the debt belongs to the company entity, not one person. Although the directors of the company have a responsibility to honour the loan, they are not generally liable for the debt. As such, it’s a less risky option.
A business loan application:
Using your personal loan for business purposes does bring a certain amount of risk. But understanding and managing that risk is part of your remit as an owner and director.
Despite the risks, there are some scenarios where using a personal loan for business reasons could be the best fit for you and your business. It’s important to understand the upsides and downsides of choosing this path and using your personal finance to fund your company.
Advantages of using a personal loan to fund your business:
Disadvantages of using a personal loan to fund your business:
There are multiple reasons why you might think about taking out a loan. You might consider using a personal loan for business purposes to fund a new startup venture. Or you might need finance to sort out the short-term cash flow issues the company is experiencing.
But should you get a personal loan for your business in these scenarios?
Now’s a good time for us to look at the situations where a personal loan might be a good idea – and the situations where a personal loan is absolutely not the best option.
Let’s start by looking at the scenarios where it makes good sense to take out a personal loan for the business.
Although taking out personal finance to kickstart your business plans can be a potential fit in some instances, there are situations where a personal loan is not the right option.
There are business scenarios where taking out a personal loan to fund your company can make good sense but, as a director of the company, you want to make sure you’re aware of the legalities of doing so, and how this could impact your tax affairs.
The legalities of using a personal loan to fund your business are a grey area. Although it’s not illegal under UK law, most terms and conditions from banks and lenders will prohibit the use of the funds for any purposes other than personal use.
Interest payments on personal loans are not usually tax-deductible, while interest payments on business loans are tax deductible. But if the loan is used for certain qualifying business purposes, you may be able to make a claim for relief.
Interest may qualify for a tax deduction if:
It’s vital to meet HM Revenue & Customs’ (HMRC) strict criteria for tax relief. Failing to do so could lead to penalties.
It’s good practice to keep your personal and business expenses, bookkeeping and accounting entirely separate. This gives you a breadcrumb trail of transactions, without any confusion between which expenses are for personal use and which for business.
Using a personal loan to fund your startup or business can muddy the waters and could lead to issues when you have a company audit.
We’ve looked at the pros and cons of a business vs personal loan for business. But when a personal loan is not suitable, what are the alternative routes to finance you could explore?
We’ve highlighted four different business finance options that you could consider.
Small business loans come in a variety of formats and will usually be offered by your bank or a recognised lender. You borrow a specified amount and pay it back to the lender, with interest, over an agreed period. Some loans are unsecured and others are secured, meaning you’ll need collateral to secure the funding.
Business crowdfunding helps you raise small amounts of money from a large number of people, typically via an online crowdfunding platform, like Kickstarter. You can pitch your project, product or venture directly to the public, who can then make small individual contributions, often in exchange for rewards, equity or early product access.
Peer-to-peer (P2P) lending uses a digital financial platform to directly connect individual borrowers with individual lenders. Investors can lend money directly to borrowers, earning interest on their investments. Borrowers access potentially lower-cost financing, based on their creditworthiness,
Invoice finance helps your business access cash tied up in unpaid invoices. Instead of waiting for customers to pay, a lender advances a percentage of the invoice value—usually up to 90%—providing immediate cash flow to cover operational needs. Once the customer pays the invoice, the lender releases the remaining balance, minus a small fee.
When it comes to financing your business, most experts would advise you to keep any debt or borrowing inside your company, rather than taking out a personal loan. A business loan rather than a personal one protects your personal credit, gives you more options on how to spend the money and helps to build your business credit.
That’s why we designed the iwoca Flexi-Loan specifically for the needs of small businesses, giving you maximum flexibility and control over your finances.
Find out how to apply for an iwoca loan and see how we can help support your business’s financial needs.
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In certain circumstances, a personal loan can be used to fund your business. But there are other lending options to consider.
A personal guarantee is a legal commitment to personally repay the loan if the business is unable to do so. Some business loans will require a director of the company to sign one, in the event that the business defaults on the loan.
If you default on the personal loan, this can impact on your credit score and your ability to borrow.
Using a business loan to cover personal expenses could be seen as fraudulent and will break the terms of the loan agreement
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