Maintaining an enterprise is difficult. Besides the private budget, the owner has to track all processes in his project. From goods production to marketing, cash flows touch each aspect. Another difficulty is the separation between personal money and assets. It’s especially painful when you borrow – who will bear the responsibility?
It’s high time to discover all particularities and stop mixing life with work. See how to manage your debts and avoid risks while borrowing money.
Are Business and Personal Finances Connected
Officially, these two spheres are legally separated. Nowadays, the venture exists separately from its founder – has its credit score and history, operates the processes, and maintains the documentation. Responsibility for its activities may even lay on several people – co-owners and founders.
However, it works only for large corporations with massive budgets and branches. Small ventures commonly belong to a definite body and have a closer connection. Despite your private and business finances aren’t legally connected, their state influences both spheres of life.
Let’s assume, you make some money to extend your factory, or need some support for your company during the crisis. What do lenders usually check while processing your application?
- Project’ reports and history
- Owner’s personal information
- Owner’s credit score, history of payment, and previous work.
It’s a common practice that protects banks from unreliable borrowers. If you cannot maintain wellness in daily life, you’d hardly achieve success in entrepreneurship. Let’s see, what’s the deeper connection between these two fields.
Credit Score: How it Determines Your Opportunities
There are two types of the score – business and personal ones. Both of them are a number that shows the client’s ability to borrow and repay debts on time.
Both are determined by the credit bureaus depending on the history of payments, the number of applications, and present debts.
Officially, they are independent measures – each of them is charged for the relevant life sphere.
| Personal Score | Business Score | Range |
| 300-629 | 0-25 | Bad |
| 630-689 | 26-50 | Fair |
| 690-719 | 51-75 | Good |
| 720-850 | 76-100 | Excellent |
Applying for a loan, you provide the lender only one of the scores, relevant to the credit type. But the company usually discovers both ranges to make a sober conclusion.
How to Choose the Loan
#1 For Individual Needs
The choice varies from a 1500 dollar loan to large installment credit. The choice depends on your needs and opportunities. These options are the most common option among Americans. They are given for private bodies and offer all possible conditions and applications.
The interest varies considerably depending on the borrower’s rate and the lender type – private ones usually ask for a higher percentage. An average number across the USA is 9,41%. But in general, it differs from 6% to 36%.
To obtain money for your needs, take several steps:
- Collect the necessary papers: identity document, information about your present job and source of income; credit score, and history.
- Apply at the bank or private lender. The choice depends on priorities: online services usually ask for higher rates, but give a quick application and provide convenient conditions; bank options are hard-to-obtain, but the interest here is much lower.
- Wait for approval: be attentive to your money during this period. Don’t borrow from your card and avoid large purchases.
#2 For Your Enterprise
According to a recent survey, over 7,5 million entrepreneurs are this close to folding and will close their businesses if all business restrictions remain unchanged in the next 5 months. They can’t cover their expenses and financing leaves something to be desired.
The only way out today is to search for additional money and try to stay afloat. Business loans can be a good decision. These loans are given to entrepreneurs to extend the project or survive hard times.
Common reasons include:
- staff recruiting
- procurement of equipment
- new office rent
- starting new branch
- surviving hard times during the crisis or lockdown
Obtaining this type is harder than others: personal info isn’t enough. The borrower prepares all documentation about the project and its development, proving the prospects of the venture.
The average interest depends on the lender type:
| Lender | Average annual rate |
| National banks | 2,5-7,16% |
| Private companies/online services | 13%-71% |
Still, online lending is the most popular variant among customers – it’s available even for small startups and poor score businesses.
Can Your Mix Entrepreneur and Personal Loans: Prevent These Risks
#1 Remember that personal financial position influences both loans’ approval
Jody Grunden, a CEO of Summit CPA Group, explains how to present debts affect your new applications:
“Properly utilizing existing lines of credit and keeping them in good standing will help boost trust in your ability to handle more debt.”
The lender always examines how you treated previous money issues: whether you paid on time, made early repayments, or asked for prolongations? These details reflect your real attitude to debts.
#2 Non-payment of business debts may lead to the seizure of private property
Borrowers often prefer secured loans – the option is preferred for the low rate of interest and long-term repayment. A bid mistake here is to use private property as collateral. It’s a common practice among small business owners. That’s the only way for them to obtain profitable conditions.
Missing payments, you jeopardize your accommodation or car. Think twice before such a decision. Does your project cost such risks? Isn’t it better to improve the situation without borrowing, or find a loan without collateral?
#3 Don’t mix two types of loans
It seems a tempting trick for people with a bad history – you can use your business status to take some cash for individual needs, or vice versa. In truth, you cannot take a business loan for private issues – the bank will control the use of money, and prevent you from spending them on other spheres of life.
As for personal loans, some entrepreneurs take them to start a business or develop a small project. There are no limits to such activities. But it’s a quick way to mess up in two spheres and mix your money in one debt cycle.
Always separate your private money and assets. It’s a smart way of work conduction, used by wealthy entrepreneurs and organizations. It also applies to lending spheres – know the difference between two types of finances, and properly use them.
