Can a Business Borrow From an Owner’s Personal Credit?

Many small business owners rely on personal credit cards or loans when starting their company, before they have had a chance to build up business credit. Using personal credit to fund a business can work, but it also comes with risks that owners should understand.

How Personal Credit Can Be Used for Business Funding

There are a few main ways owners can leverage their personal credit to borrow money that goes into their business:

• Personal credit cards – This is one of the easiest sources of startup funding for business owners. Whether it’s a credit card with a low promotional rate, rewards card that generates cashback, or a 0% APR card, the spending limit and terms depend on your personal credit.
• Personal loans – Unsecured personal loans or lines of credit from banks and online lenders can provide you with a lump sum for your business. Rates vary greatly depending on your credit score and income.
• Home equity loans/lines – If you have sufficient home equity built up, products like HELOCs allow you to tap into it for any purpose including funding a business. The ability to deduct interest is an added benefit.
• 401(k) Loans – For very early stage financing, some entrepreneurs even borrow against their retirement savings which can be risky but is an option.
• Friends and family – Turning to people you know for startup capital in exchange for equity or structured payments/interest is common. Be sure to document the terms properly.

Risks of Using Personal Credit for Your Business

While easy access to financing is the main appeal of using your personal credit and loans for business, there are downsides to understand:

• Personal liability – With most personal loans/credit cards used for a business, the owner takes on all liability. The bank can go after your personal assets like bank accounts, investment accounts, or property if the business can’t pay.
• Damage to personal credit – Just one late payment on a credit card or loan in the business’s name can hurt your personal credit score which could affect your ability to get loans down the line.
• Higher interest costs – Personal loan rates are often considerably higher than a traditional small business loan from a bank or SBA loan. This can eat into profits significantly.
• Tough to separate later – Once business and personal finances are intermingled, it can be hard to later establish separate credit for the business.

Best Practices for Using Personal Credit

If you do plan to use your personal credit to help jumpstart your business, some tips to reduce risk include:

• Only use personal credit cards that have reasonable limits based on your income. Don’t take on too much credit card debt relative to your earnings.
• Explore business credit cards where possible that don’t report to your personal credit.
• With personal loans, consider the shortest term possible to pay it back quickly.
• Set up autopay from business checking accounts to avoid ever missing payments.
• Once eligible for traditional financing, shift away from personal credit.
• Consult an accountant or lawyer to properly structure the loan agreements between you as the owner and your company.

Overall, leaning on personal credit in the short-term can be okay but have an exit strategy to shift towards business financing options as you grow. Don’t let it turn into excessive long-term personal debt obligations.

Alternative Business Financing Options

Rather than tap personal resources to fund your company, here are some other options entrepreneurs should explore first:

Business Loans

• SBA Loans – The Small Business Administration offers various loan programs for eligible businesses including the 7(a), 504, microloans and more. Loan amounts and terms vary.
• Business Term Loans – Banks and alternative online lenders provide term loans targeted specifically for business funding needs. Rates can vary greatly.
• Business Lines of Credit – Lines of credit provide revolving access to capital for short-term needs. Flexible but rates are often higher.

Business Credit Cards

• Secured Business Credit Cards – Cards that require a cash security deposit to establish a line of credit you can access. Useful for early stage companies.
• Business Rewards Cards – Credit cards that help businesses earn points/miles/cashback on purchases which brings down effective costs.
• 0% Intro APR Cards – Cards offering a 0% interest rate for a promotional period (ex. 12-18 months) on purchases and sometimes balance transfers.

Equity Financing

• Angel Investors – Wealthy individuals who provide startup capital in exchange for equity stake and sometimes mentorship.
• Venture Capitalists – Institutional investors focused on providing funding to early-stage, high-growth startups with very large potential.

Revenue Financing

• Merchant Cash Advances – Funders provide you with a lump sum in exchange for a share of your future credit card or debit card sales. Payments adjust based on sales volume.
• Invoice Factoring – Sell your outstanding invoices to a commercial finance company to obtain working capital based on unpaid sales.

As you can see there are many options beyond tapping personal resources! Each comes with pros and cons to weigh for your specific situation.

Key Considerations When Borrowing for Your Business

If you do need funding to jumpstart or grow your small business, keep these tips in mind:

• Have a solid business plan – All lenders want to see you have a viable business idea with realistic financial projections and a plan for using the capital to grow profitably.
• Understand the repayment terms – Carefully assess the repayment timeline, interest rates, fees, collateral requirements and other fine print before signing anything.
• Don’t overextend yourself – Only borrow what you reasonably need for essential startup costs and operating expenses. Too much debt can sink a business quickly.
• Consult professionals – Speak to a small business lawyer and accountant to understand legal and tax implications before finalizing financing.

While tempting to rely on personal credit cards or loans at first, the risks here can quickly spiral for business owners. Having a plan to graduate towards business-specific financing options instead can pay off over the long run.

Resources

For more information on financing a small business, check out these useful articles and guides:

• SBA Loans: The Comprehensive Guide for Startups
• How to Build Business Credit
• 15 Tips to Improve Your Business Credit Score

Videos

• Comparing Business Credit Cards
• Where to Get Money to Start a Business

I hope this overview on whether and how small business owners can leverage personal credit provides some helpful insights! Let me know if you have any other questions.