Personal loan or business loan: what to use when the money is for the business

Key points

• Business loans are assessed on the business; personal loans on you.
• Mixing business costs into personal debt complicates tax and borrowing capacity.
• Personal loans are capped lower and are for personal purposes.
• A brand-new sole trader may start small, then move to business finance.

Why use a business loan for business spending?

It's assessed on the right income

A personal loan looks at your wage or drawings and your household budget. A business loan looks at what the business brings in. For an owner whose personal income on paper is modest but whose business banks $40,000 a month, a business loan often reflects the real capacity far better.

It keeps the records clean

When business purchases are paid with business debt, your accountant can see exactly what's what. Mixing personal and business borrowing means untangling it every tax time, and can make it harder to show that interest relates to earning income.

It protects your personal borrowing capacity

A personal loan sits on your personal file as a personal commitment. If you plan to buy a home, refinance or borrow personally in the next few years, every personal loan shrinks what you can borrow. Business debt is still considered, especially if you've guaranteed it, but it's assessed with the business income behind it.

It can be bigger and better matched

Personal loans are capped and usually short. Business loans can be sized to the purchase, from a small unsecured loan to a property-backed loan for a business acquisition, with terms that match how long the purchase earns.

What about the family car used for work?

This is the most common grey area. Ask honestly: is it mainly a business car or mainly a family car? If a logbook would show high business use, a business car loan usually fits better and makes the tax treatment cleaner. If it's mostly school runs and weekends with the occasional client visit, it's a personal purchase, and only the work-related portion of running costs may be claimable. Your accountant can help you draw the line.

An illustrative example

A dog groomer in Newcastle has been operating from a converted trailer for eight months under her own ABN. She wants a van fitted out as a mobile grooming salon for about $72,000. Her personal payslip-style income is modest because she's been paying herself small drawings, so a personal loan would cap out well below what she needs. Her business account, though, shows steady deposits of around $13,000 a month. A business loan assessed on those deposits, sized to the van and fit-out and repaid over the van's working life, matches the purchase to the income that will pay for it. It also leaves her personal file clear for the home loan she and her partner are planning next year.

What about credit cards for business spending?

Cards are handy for small, everyday purchases and can make sense when paid off in full each month. As a way to fund a larger purchase, they're usually an expensive choice, and a personal card used for business spending has the same record-keeping problems as a personal loan. If a card balance has crept up from business costs, rolling it into a properly structured business loan can be cleaner and cheaper.

Buying something for the business?

Fund it through the business and keep your personal finances clear. Asking us about it won't touch your credit file; a check only comes into it once you decide to go ahead. We don't pass your details to a crowd of lenders. One person at Loanster looks at the purchase and the business, and rings you to talk through the options.

Please fill in the form accurately, including how long you've been trading and how the purchase will be used, so we can point you to the right option first time. See what your business could borrow.