As a small business owner, you cannot rule out the possibility of cash flow issues when your business is fully operational.
When you created your company, it became its own legal entity, completely separated from yourself. The money allotted in the business line of credit was granted for the purpose of business expenses in order to keep the company running in leaner financial times.
1. Legal Consequences
Using a business line of credit for personal use can make you vulnerable to business liabilities. First, using funds for personal expenses could make you look suspicious to any business partners. Another issue arises if someone were to sue your business as now, you could also be found personally responsible to pay out expenses.
2. Tax Complications
Interest paid on a business line of credit is generally tax-deductible due to it being a business expense. The interest paid on personal lines of credit is not tax-deductible. Using business lines of credit, loans, or credit cards can get you in trouble with the GST.
While there is a grey area if you registered it as a sole trader (as you don’t have to create a different entity for the business), you would need to claim any funds used for personal expenses and pay the appropriate taxes.
3. Misuse of Money Can Ruin Future Funding
If it is found that you have misused funds in your business line of credit, it will reduce your chances of being approved for future funding. Lenders carefully check histories and look over expense books for red flags. If they find unexplained expenses or withdrawals, they will be less likely to trust you with any sort of loan.
Can You Use a Personal Line of Credit to Fund a Business?
While you can use a personal line of credit or a personal loan for business, there are a couple of risks involved. As the loan is connected to you personally, your credit can be damaged if something goes wrong and you are unable to repay the loan. You may also have a difficult time securing additional personal loans or lines of credit for your own use if it looks as though you already owe a lot of money. For more information on alternatives read our article on funding options for a new business.
How to Use a Business Line of Credit
You can use a business line of credit for any company expenses. As you build your company, there may be times where you need a little extra cash. A business line of credit allows you to access and repay cash whenever you need it, without having to reapply for a new loan.
1. Cover Fixed Expenses
There are times where you may need to use your business line of credit to cover fixed expenses for your business. This could be recurring software costs, utility fees, insurance, or even the mortgage or rent of your office. Occasionally companies will have a lull in sales and may not earn enough to keep up with their basic needs.
The ability to quickly access funds from a fixed line of credit can buoy a small business through lean months until they begin earning again.
2. Cash Flow
Every business encounters unexpected fees or expenses. Perhaps your printer broke and you need to repair or replace it. You may get the chance to attend a course that could increase sales, but you must pay for it upfront. A large order has come in, but you need cash to pay for the materials and labour to complete the order. Especially as a new, small business, these little expenses can add up. Without capital to draw back on, you can find yourself stressed.
Applying for new loans takes valuable time that you could be using to generate more revenue for your company. A business line of credit, however, allows you to take and repay back funds as needed, alleviating your stress and allowing you to focus on what really matters.
Business Line of Credit with &Solved
&Solved has been helping Australian companies through financial hiccups for years. We understand the need for occasional access for extra funding and we strive to make things easy for you through our business lines of credit. Contact us to find out how we can help your growing business.