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Advantages and disadvantages of using personal lines or loans to fund a business

Advantages
  • No business plan required.
  • Fast - decision is made on your credit score
  • Sole proprietors are personally liable for any loan, so it doesn't matter what kind of loan they get.
Disadvantages
  • Your personal credit score is at risk.

Lines or Loans?

A personal line of credit is like a credit card - you only pay interest on the amount used. Your payments will vary each month based on the balance. You are expected to continually use and pay back the line of credit, without a final payoff date.

For a loan, all the funds are distributed to you and you pay interest on the total amount. You continue to pay regular payments until the loan is paid in full.

Corporation? Here are some tips

  • Using a personal line of credit for a corporation mixes personal and business assets. This could invalidate your corporate status. If you want to use a personal loan, it is best to use the person as a guarantor on a business loan. That way, you can keep personal and business assets separate.
  • If a shareholder is using a personal loan to fund his/her initial shares of stock, the shareholder should pay back the personal loan; NOT the corporation. Think of how it works with Google stock. If you borrow money for 10 shares of Google stock, you pay the loan back - you don't expect Google to pay the loan for you.

Best Practices

  • Use personal lines and loans for guaranteeing business debt. This keeps business and personal assets separate - which is a good business practice, and a requirement for corporations.

 

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