In today’s volatile economic environment, people are being more cautious when it comes to loans and borrowing money. When it comes to financing your business, it is necessary that you know what kinds of loans are out there, and how the different types of loans available could affect your business and even your personal income. The purpose of this article will be to compare a business loan vs a personal loan.
We strive to give small businesses the information they need in a nutshell. It is important that you understand a few basic differences between consumer loans and business loans, and how LLCs can help protect you when times are difficult.
In today’s volatile economic environment, people are being more cautious when it comes to loans and borrowing money. When it comes to financing your business, it is necessary that you know what kinds of loans are out there, and how the different types of loans available could affect your business and even your personal income. The purpose of this article will be to compare a business loan vs a personal loan. We strive to give small businesses the information they need in a nutshell. It is important that you understand a few basic differences between consumer loans and business loans, and how LLCs can help protect you when times are difficult.
The Disadvantages of Using Consumer Financing for Small Business Funding
Personal loans are also known as consumer loans or consumer financing. They should be obtained for things like automobiles, home financing, and other types of personal loans. These types of loans are for personal use. Your borrowing capacity is lowered as your debt-to-income ratio increases. If your business is having a rocky start, and you have personal loans backing it, you may not be able to obtain a home loan, or a car loan, because of your outstanding debts. Consumer financing may or may not require collateral in case the borrower cannot repay the amount owed.
Personal debt is generally not associated with your business, and it shouldn’t be. It is not a sound financial move to use consumer financing for small business expenses. If this happens, the debts incurred by the company can be considered personal debt, which will not only affect your personal budget; but will also reduce your ability to borrow money for any future personal needs. For example, if you have borrowed heavily for your business with personal loans, and your car decides to go to that big Junkyard in the sky, you may not be able to secure a loan to purchase another one depending on your personal credit limit.
Another thing to remember is that we are living in a society where if someone takes you to court over something company related, it could affect your personal assets if personal loans were used to stake the business. So, you never want to take out a consumer or personal loan to financially back your business.
What is Commercial Financing for Small Businesses?
Commercial Financing is business loans, and as the name implies, belong to the business. They can be used for equipment financing if you need new work tools, or to finance fleet vehicles for your employees. Companies are determined to be responsible for their own actions and their debts. This can mean in some cases that the people who own them won’t be held responsible (at the cost of personal funds) for actions taken by the business. The result is that there is an invisible wall separating your personal finances and your business finances.
What are the Advantages of Business Loans?
What are commercial financing advantages to me as a business owner? Business loans are advantageous because they can lead to tax breaks when used correctly! Loans for your business can be arranged as an operating lease, making it a rental expense.
A rental expense is an operating expense, and therefore would not show on your balance sheet, and therefore is tax deductible. The IRS defines Rent Expense: as: "Any amount you pay for the use of property you do not own. In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. If you have or will receive equity in or title to the property, the rent is not deductible.”
What Does it Mean to Have Business Liability?
There is some confusion out there about what a Limited Liability Company (LLC) or a Corporation is. Whether to set up an S-Corp or a C-Corp, it is designed to protect business owners and their personal assets from the everyday risk of operating. The risks can include Automobile Liability, Service Liability, or Product Liability. LLCs and corporations are similar, yet different. The differences lay in the tax laws, but they are alike in the fact that they both have to be registered in the state they are physically located. They also provide legal protection from lawsuits and judgments filed by customers, but there are some rules to follow. Here are a few:
- The company must avoid gross negligence.
- Professional service companies, such as doctors and lawyers, must add a ‘p’ to their LLC (LLCP).
- A series LLC can separate one asset from another.
- The business can stay intact if one member of the LLC leaves.
- Business and personal assets must be separated, such as cash and bank accounts.
Also remember that personal insurance does not cover business claims, and personal extended warranties can be canceled if the warranty holder determines the item is being used for business or commercial use.
Piercing The Corporate Veil
So what happens if you don’t follow the rules? Known in industry circles as ‘Piercing the corporate veil’, this means you have not followed the rules and maybe have allowed your personal and business world to combine. If you are sued, the courts may disregard the legal entity you have established and thereby allow the plaintiff to bring legal action against your personal assets. Applying a personal loan to your business may disqualify you from general liability protection. This means that the courts could view this as evidence that your business has not been managed or operated independently from your personal assets, and your personal assets would be included in the proceedings.
Can you now name some of the differences between a business loan and a personal loan? In this article, we have defined what a consumer loan is. We have answered the question “what is commercial financing?”. We have compared the two types of loans and explained why you shouldn’t use consumer financing for small businesses. We have also explored the benefits of an LLC, who could use one, and how it can protect your personal assets if things didn’t go well. We have also explored just a few of the rules which pertain to an LLC and corporation and what could go wrong if you didn’t follow them. At Aztec, we are specifically focused on business lending rather than consumer financing. Everything we do is designed to make sure that the contracts that you sign qualify as a business financing option so that you can fully comply with the business finance and tax laws. Apply for Business Financing today with Aztec Financial!
This post originally appeared on Aztec Finacial's Blog and has been republished with their permission.
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