Personal debt vs business debt

PWhen you need credit for your business, where do you go? Do you look around for the best deals, or use your credit card so you can act quickly? Business owners often use personal credit options in a variety of situations. However, with different costs and restraints associated with different products, it’s important to  check if this is the right approach. Below we take a look at the options you have and how you can use them.

Credit cards

Business and personal credit cards work in much the same way. You’ll have a set credit limit and can make purchases up to that amount. You may have an interest free window to pay it off, say 30-60 days, but then you’ll pay interest on any outstanding balance.

All lenders will perform a credit check when you apply, and your credit limit will depend on how creditworthy you or your business is. Many businesses will use company credit cards for their day-to-day expenses as they’re easy to set up and manage. 

Business credit cards or personal credit cards?

When times are tight, some may then lean on their personal credit cards. As an existing line of credit, it’s quick and convenient. However, it’s always worth checking what other credit options you have available and if you could meet your needs at a lower cost elsewhere.  

Benefits

  • Multiple people can use the same account 
  • Easy to track and limit employee expenses 
  • You may also get cashback, loyalty points and other rewards

Downsides

  • With rates from 15-25% APR it can be expensive if you don’t clear the balance each month 
  • Not suited to big investments or growth projects
  • Interest and delayed payments can make managing cash flow tricky

Overdrafts

Overdrafts can be a useful means of accessing credit. If you have one set up with your bank, you can take out more money from your account than you have in there. They work in the same way for business and personal accounts. 

For business owners that already have personal overdraft set up, the convenience of using it for business purposes can be tempting. Depending on your provider, there may be charges or interest applied for every day you use your overdraft, so always check if it’s the best option.

Benefits

  • Quick access to extra working capital

Downsides

  • Usually a low credit limit

Loans

In the last decade, online lenders have radically changed the loan industry. Businesses can now get a loan in just a few days, and it has become a key avenue of business credit. 

Often with higher available limits, you can fund projects large and small, as well as tax expenses and other day-to-day running costs. A working capital loan can also make you less reliant on other, shorter term credit options. 

Business loans or personal loans?

Lenders will perform a credit check to determine how much you can borrow and the interest rate you’ll pay, and you’ll make repayments over anything from 3 months to 10 years or more. 

Business and personal loans work in just the same way, except lenders will assess the creditworthiness of you as an individual, rather than your business. Typically, businesses can borrow much more than an individual. Personal loans are most often used for business purposes when first starting out, or when you want to grow your business. 

Benefits

  • Higher limits to fund projects both large and small
  • Interest rates can start very low
  • Fast applications – get funds in days
  • Secured and unsecured lending options
  • Suitable for a wide variety of business needs 
  • Fixed monthly repayments make it easier to plan

Downsides

  • Longer term financial commitment
  • Less suitable for tracking expenses
  • Personal guarantee or other security may be required

Other types of business debt

Some lines of credit are only available to businesses. Depending on how you operate, the below options could suit your needs.

Invoice financing

A lender will pay you the majority of the invoice up front, then recoup the costs when the invoice is paid and take their fee.

Merchant cash advance

A useful line of business credit if you have a lot of customers paying by card, merchant cash advance allows you to borrow based on your card sales. 

Asset finance

Asset finance allows is simply a loan where you use an asset as a security. It’s often used to buy new equipment, vehicles or machinery, but can also be used to release cash from assets you already own.

If you’re looking for fast, affordable finance, check your eligility for a business loan in 30 seconds at fundingcircle.com/businesses

All information correct as of December 2019.