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Why You Need a Business Loan (Not a Personal Loan) for your Business

Personal or business loan

We’ve all heard the sayings about “mixing business with pleasure,” warning that business and personal matters could be a risky combination. This is especially true when it comes to finances.

It’s not uncommon for Canadian small business owners to look to personal loans for capital, especially newer businesses that have yet to establish the credit history required by many traditional lenders to be considered eligible for a loan.While the temptation to use readily available personal credit for business may be strong, there are some key considerations to take into account first.

Protect Your Personal Credit

The stakes are high when it comes to your business, and often there is more than your reputation on the line. But the reality is that while businesses can come and go, your personal credit history will always stay with you, and will always need to be monitored, managed and maintained. Personal loans in Canada are intended for life goals and major milestones, so making these funds available to your business can be a gamble. Remember, lenders are not the only ones looking at your personal credit – landlords and employers often look at your personal credit score too.

One of the major factors that impact your personal credit score in Canada is utilization ratio – in other words, how much of your total available credit you are using. Obviously, if you are using personal loans and credit cards for both personal and business needs, you may appear maxed out and stretched to credit bureaus. Other credit behaviours such as seeking out multiple loans may raise red flags as well.

Building Your Business Credit Profile

As your business matures and grows, it will become increasingly important to establish and grow a healthy business credit profile. Without a good credit history, your business will struggle to access credit in the future. Obtaining even small loans or low-limit credit cards as early as possible can help you demonstrate good behavior as a small business owner early on. Alternatively, using personal loans for capital does nothing to help your business credit.

Simplify Accounting

Whenever possible, it is always recommended that personal and business items such as credit cards and lines of credit be kept entirely separate. Doing so can help eliminate headaches to you and your accountant – especially during tax season.

The chances of mixing business and personal funds can be higher if personal accounts are used for business. Obtaining a business loan specifically for business purposes can help ensure a clean separation. This in turn makes it easier to manage as well as to take advantage of favourable accounting rules. For instance, credit card interest paid for business purposes is tax deductible, while interest on personal spending is not. Having separate accounts for clearly separate purposes will eliminate any confusion. In the event that your business is audited, the simpler your books the better.

The Bottom Line

While best practice is to utilize business loans for your business and keep personal credit separate, ultimately it is a personal decision (pun intended) for the small business owner. It can be tough to obtain a traditional business loan from one of the big banks but online lenders in Canada like Lendified that specialize in loans for small businesses have higher approval rates. As with any major financial decision, it’s important to do thorough research and become familiar with the alternatives.

If you are interested in getting a free quote from Lendified click the button below. Our application takes less than 10 minutes to complete and our loans are more affordable than other alternative financing options.

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About the Author

Lendified

Lendified

Lendified is Canada's premier online lender for small businesses. The company was founded by former bank executives dedicated to provide businesses with fast, easy, and affordable financing. The Lendified team regularly produces blogs and guides to help small business owners succeed.

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