One of the most frequently asked questions we hear, as a lending platform, is whether a business owner can take a business loan in order to to pay off personal debt. Let’s discuss business loans, how they work, etc first.
Business loans are given against the business. They are provided for the intention that they be used for working capital. That means it’s expected that a business owner will use the working capital for expenses, employees, payroll, etc. The thing is, there’s nothing that contractually enforces this. There’s nothing in the contract that specifically says a business owner is required to use a business loan for working capital, or some specific expense.
There are certain situations where a business loan cannot be used for a different purpose. For example an SBA loan given for a commercial real estate purchase – can only be used to purchase real estate. It cannot be used for anything else besides that. Another example is a hard money loan. Most hard money lenders, who give you funding for a real estate property, will expect the funds be used for purchasing the property and will write the check to the prospective seller, not you.
While there are situations where this might be different, usually – it’s true.
Should I use a business loan to pay off personal debt?
Rather than ask, can you do it – the question should be: SHOULD YOU DO IT!
This is a complicated question.
Many businesses operate on a 10-25% margin, at best. If you take on additional debt, it can harm your business cash flow – because most business loans will require either a daily/weekly payment. That means on a daily basis you’re losing money.
Which business loan SHOULD not be used to pay off a personal loan
Merchant cash advances are examples of business loans that should not be used to pay off personal debt. The main reason for this is because merchant cash advances are SUPER HIGH interest rate loans. While you could use the money to pay off your personal debt it could ridiculously harm your business. As a result, it’s advantageous to use this money to help improve your business and invest into the business. If you use it to pay off a personal loan, it could result in a huge burden being placed on your business
*If the personal loan/debt needs to be paid off urgently, then it might make sense to use the merchant cash advance to pay off the personal loan. But in most normal cases, it won’t make sense.
When should you use a business loan to pay off your personal loan?
One example where a business loan should be used, is when you’re late on your personal debt and your credit score is hurting. If you’re late on your payments on your business loan, your business credit will suffer. But if you’re late on your personal debt – then your personal credit score will suffer. For some people, the personal credit score is more important than the business credit score.
Can you take a business loan to pay off your personal loan?
The final answer to that is yes – you 100% can take a business loan to pay off your personal loan. Depending on the situation, it may not be recommended – but it’s possible. Taking a business loan, just like any other form of financing is a complicated decision. You should make sure to consider all the aspects of your decision before taking the loan.
Delancey Street can help
Delancey Street understands business financing is a tough and complicated process. Our expertise lies in helping business owners understand their objective, and aligning them with the best financial solution. We can help you with a number of financial options, such as: