14 Sep Should you use a personal line of credit for your business?
Experts say it is wise to keep your personal finances separate from your business’s. While this may be true, at some point in the life of a small business, an owner may have no choice but to use a personal line of credit (LOC) as a source of funds. What would that mean for the business and its owner?
Before we get into that, let’s look first at the advantages of a line of credit that apply to both personal and business LOCs.
The pluses of any line of credit
An LOC is an unsecured loan of a predetermined amount that lets you borrow money as you need it. It’s a revolving source of funds, which means that as you pay this loan down, the money becomes available to you again. Advantages of a line of credit include:
- Less costly than a credit card cash advance
- More flexible than a term loan
- Usually free of application and annual fees, and pre-payment penalties
- No collateral required
A line of credit is especially useful during unexpected gaps in capital. While it’s not unlikely for a new company to experience fluctuations in cash flow, even established businesses experience downturns and other surprises. With an approved line of credit– personal or business — you’ll be ready, come what may.
Business vs. personal line of credit
Getting a business line of credit is typically more complicated and paperwork-intensive than qualifying for a personal one, especially from traditional lenders. In fact, most traditional lenders, like banks, will give a line of credit only to businesses that have a minimum of two years’ worth of operating history.
So, for a business that’s less than two years old, using a personal line of credit to make ends meet in a pinch may very well be a viable option. However, if your business is a corporation, using a personal line of credit for business purposes could invalidate your corporate status. All the more reason to explore the possibility of getting a business LOC from an alternative lender, even early on. An alternative lender– like a reputable online source–
A few more things to consider
Let’s say you’ve opted to use your personal line of credit for your business. You’re not jeopardizing any collateral, but you are putting your credit score at risk; make sure the risk is worth it.
For cases other than emergencies, you might also consider using your LOC in ways likely to generate more revenue, like a new marketing campaign, or a booth at a trade show. Balance the potential rewards against the possible risks, and decide accordingly, but guard against the “buy now and pay later” mindset. That can create bills a business can’t afford to pay, and in the process, negatively impact an owner’s credit score.
Used judiciously, a line of credit can be a cost-effective solution for dealing with the inevitable ups and downs of life in business. To put it another way: Applying for a personal or business LOC – just in case – is a smart idea.