The short answer is no. You shouldn’t leverage a business line of credit for personal expenses. Even though many business owners consider their businesses as extensions of themselves, using your line of credit for personal expenses, can cause you major issues down the road.
At the end of the day, lenders so not monitor every transaction to confirm whether or not it is for business or personal use but when it comes time to filing taxes you may encounter legal ramifications if it is discovered that a business line of credit was used for personal expenses.
It’s important to note, that if a loan is needed for personal use, you should be applying for a personal loan.
Difference Between Personal & Business Line of Credit
For a personal line of credit, your approval will be based solely on your credit score. It is a personal guarantee like a credit card. You are given a credit limit, only use what you need, and pay interest on your balance.
For a business line of credit, you can leverage your business for approval. Lenders will look at the big picture of your business, like sales or the amount of time in business. A business line of credit could be quite easily approved for an existing company based on the overall business's health.
Downfalls of Mixing Personal and Business Expenses
- There are tax differences between the two that are subtle, but, of course, pertinent. Suppose the tax laws are not explicitly followed, such as strict division of expense accounting. In that case, it could garner the Internal Revenue Service's interest, who does not take unfulfilled tax payment lightly- if even by accident. So, extreme care is necessary if one were to attempt to mix business and personal finances.
- Legal liability could be a sticky issue, as well. While it is easy for a business owner to think of the business as an extension of self, this opens up a world of personal legal liability. According to Crestmont Capital, "If a business owner is using the business as an extension of their personal life, the business owner can potentially be held personally responsible for any legal liabilities of the business." That means that your personal life could bear the legal brunt of any perceived indiscretion.
- Future funding could be at risk if you operate your finances outside of the loan agreement's covenant. In other words, if your lender doesn't think you are using the funds in good faith according to how they were earmarked for approval, you are putting your ability to get re-approved with that company at significant risk. Underwriters often look for red flags in expenditures. Any cross-use of finances might put further funding at a substantial disadvantage.
As we have seen, the repercussions of mixing personal and business lines of credit risk your business's loss. The stakes are simply too high.
How Does a Business Line of Credit Work?
A line of credit is like a credit card. You are given a limit to the line of credit (like your credit card), and you borrow what you need, and you only pay interest on what you owe.
As opposed to a personal line of credit, a business can also be leveraged for approval.
It's an excellent way to borrow instead of a term loan with a bank that could for a larger amount than you need, and you could be looking at lengthy approval times. You will be paying interest on the full loan until it is paid off, and you will have to be re-approved every time you wish to obtain more funds.
Are Purchases on a Business Line of Credit Tax Deductible?
According to the website Supermoney, in general, the interest charges paid on a business line of credit are considered a deductible business expense as long as it is used to pay for necessary expenses in your business's running.
Purchasing equipment and other necessary supplies are of themselves allowable business deductions.
The IRS may require an itemization of items purchased with borrowed money to justify the expense.
Always consult with your accountant when it comes to different tax benefits your company may or may not qualify for.
How to Obtain a Business Line of Credit
Still wondering how to apply for a business line of credit?
Applying for a business line of credit at ROK Financial couldn't be easier. ROK Financial can offer the best small business line of credit. Our streamlined processes and strong relationships allow ROK Financial to find the right terms for your practice or healthcare organization.
- Complete the application for a business line of credit with some necessary information to see which financing options you qualify for and be paired with a Business Financing Advisor.
- Your Business Financing Advisor will contact you within 24 hours.
- Tell them how they can help you find the right business line of credit found in briefing; could not extract the link> for your small business needs. Your Business Financing Advisor will work to find the best loan for you in a global marketplace of 75+ lenders.
- Get approved in as little as 24 hours and receive funds in 1-3 days.
It’s that simple!
About the Author, Madison Taylor
Madison Taylor is the Brand Ambassador at ROK Financial. She is responsible for raising brand awareness and business relationships with business owners across the country. Madison loves that she plays a small role in getting Business Back To Business Through Simple Business Financing and looks forward to hearing what you think about the blogs she creates! Madison has been working in the financial space for six years, and loves it! When she is not at work, you will find her at home learning a new recipe to test out on her family or going on new adventures with her friends.