You can start a business with just a few steps and clicks. You can head to a personal loan provider – either a bank or a financing company – and sign up for an unsecured loan to serve as your capital. On the other hand, you can use a high-limit credit card to finance your initial equipment and facility expenses.
While these sound great, using your personal credit to finance your business can be challenging. To make sure you’re informed with your financing decision, here are a few reasons why using your personal credit to fund your business is a bad idea.
Tangled Business and Personal Expenses
While you can purchase business equipment and facilities and pay for salaries with your personal expense account, be mindful that this will tangle your taxation and deduction in your accounting. Doing this can make your estimates off the mark and challenging to apply for business-oriented financing in the future.
Credit Score Issues
Startups are risky – most perform poorly during their first year. Credit cards and personal credit typically need a complete payment within 12 months. If you can’t pay the financing on time with business profits, you’re jeopardising your credit score. As a result, if you need to pay for personal expenses, the slumps in your business will prevent you from using your available credit.
Future Financing Challenges
Mixing business and personal banking should be avoided. While it may seem to make your banking simpler, it will actually make your situation more complicated especially during the times when you have to pay for taxes and you need to seek funding from investors..
Low Limit Loans
Credit cards and personal loans are usually unsecured loans, which are financial products without collateral or security. Unfortunately, their high interest on unpaid debt allows them to balloon and leave you short on essential funds because you have to pay them back. You’ll need to open multiple credit card lines if you want to use them to purchase equipment and renovations for your facilities, which is challenging to manage.
Personal credit lets you extend your loan easily. You can pay the minimum required repayment and keep the debt ballooning until you can pay the entire financing. The compounding interest rates will make the balance expensive and troublesome to repay. However, you can reach this state easily if you finance your business with personal credit.
The Best Alternative
Personal finance can give you the capital your business needs. But, to separate your personal credit from your business, taking out a business loan is much more ideal. Most established banks let you apply for a business loan collectively with your partners. You can combine your collateral and present your business plan’s cash flow in one year to the bank. Keep in mind that some banks require your business to have at least a year’s worth of activities to qualify for their business loans.
Working with digital wholesale financial banks is the best way for small and medium enterprises to finance their business. For example, ANEXT Bank can grow your money at 0.68% p.a. daily with no minimum balances and no fall-below fees. Open an account today for free!