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Business loans can be cheaper than personal loans. They sometimes have lower interest rates and better payment terms. If you’re a small business owner and you have a small business loan then you may have wondered if you can use a business loan for personal use.
In this guide we explain the rules for business loans and if you’re allowed to use a business loan for personal use. We also answer common questions like “what are the main differences between business loans and personal loans?” and “how can I use a business loan to maximise my family income?”
Table of Contents
- What is a business loan?
- Can I use a business loan for personal use?
- Where can I get a business loan?
- Frequently asked questions?
What is a business loan?
There are a huge range of different business loans and each is suitable for different businesses and different purposes. A simple business loan is similar to a personal loan but it is designed for businesses.
Here are some of the key features of a business loan:
- Lending for small businesses is often based on your personal credit rating.
- Flexible business loans tend to have higher interest rates.
- Loans include secured and unsecured lending.
- Interest and fees are usually a tax deductible expense.
- Loans may be larger than personal loans as they are based on your business’s finances.
- Lenders need to see financial records and bank statements as part of the application process.
How can I use a business loan?
Business loans are designed for business use rather than personal use. You can use a business loan for a variety of business purposes include the following:
- Helping with business set-up costs including rent deposits or refurbishment costs.
- Paying for a business expansion.
- Financing a seasonal business where there are long delays between buying stock, paying wages and making sales.
- Paying unexpected bills or expenses.
- Covering long customer payment terms or late paying customers.
- Financing capital purchases.
- Buying a premises.
- Paying for marketing or advertising costs.
What are the main differences between business loans and personal loans?
Business loans and personal loans are designed for different borrowers and they also have a number of different features. Here are some of the common differences between business and personal loans.
|Business loans||Personal loans|
|Application process||Application process is usually more complicated than for a personal loan. Lenders may ask to see financial records and bank statements.||Simple application process. Lenders will usually assess your personal credit record and consider whether loan repayments are affordable.|
|Interest rates||Interest rates may be lower than for a personal loan, depending on the loan type and financial health of your business.||Interest rates are based on the loan amount, the loan affordability and your credit record. You may be offered a different rate to the headline APR.|
|Loan amount||Lenders will often consider lending a larger amount than a personal loan as they take into account the future potential profits of the business.||Lenders base loan amounts on personal affordability so it may be difficult to get a loan if you don’t have a stable income. You may also be offered a lower loan amount than for a business loan.|
|Tax treatment||Interest and fees can be deducted from your business profit as a business expense, reducing your tax bill.||Interest and fees are not tax deductible.|
|Other features||Some loans include business support and advice and some offer flexible lending options.||Personal loans are usually simple with few additional features.|
Can I use a business loan for personal use?
Most business loans don’t allow you to use the loan for personal use. Take a look at the terms and conditions of your business loan to check if there are restrictions on the use of the loan.
It’s important to be up front when you apply for a business loan. You will often have to tell the lender how you intend to use the loan as part of the application process. The lender could withdraw funding and ask you to repay the loan if you are using the money for a different purpose to your loan application.
Can I use a business loan to pay myself a salary
Small business owners can pay themselves a salary from their business earnings. This is part of your business expenses, just like other types of business spending. You should include your salary as part of your business plan and cash flow forecast.
This means that it may be possible in some cases to use a business loan to pay yourself a salary. Check the terms and conditions of your business loan.
You will still need to make sure that you have a repayment plan in place and you will have enough cash to repay the loan on time.
Can I use a business loan for personal expenses?
A business loan can only be used for business expenses, not for personal expenses. Business expenses could include the following:
- Travel costs, including petrol and car hire
- Accommodation and food costs when you are travelling for business
- Uniform costs
- Professional subscriptions
- Advertising or marketing costs
- Staff costs
- Office and stationary costs
- Equipment servicing costs
- Business insurance
- Software and IT costs
Can I use my business bank account for personal use?
Business bank accounts are designed for business use. They are ideal for keeping your business and personal finances separate, which will make it easier to prepare your end of year accounts.
Most business bank accounts don’t allow personal use. This is because the bank’s assessment of your application was based on your business’s finance needs and risk profile. Check the terms and conditions of your bank account to see if the use of the bank account is restricted.
How can I use a business loan to maximise my family income?
Interest and costs associated with a business loan are usually tax deductible as a business expense. This means that it’s important to use a business loan where possible to minimise your tax bill and maximise your personal income. If you use a personal loan, where a business loan would be more appropriate, it could unnecessarily increase your tax bill.
For example, Jenny buys a van to use for her work as an electrician. She takes out a personal loan and pays for the loan through her personal bank account. Her accountant doesn’t notice the loan payments or suggest deducting the interest as a business expense because all the payments come out of Jenny’s personal account. Jenny could have used a business loan, paid for the interest with her business bank account and classed the interest as a tax deductible expense.
Where can I get a business loan?
There are many places to find a business loan or other business finance, depending on the type of finance you want to apply for. Here are some options for each type of funding:
Frequently asked questions
Using a business loan for personal use may affect year end accounts, which are used to calculate your tax bill. This is because interest on a loan used for personal reasons is not tax deductible, whereas business loan interest is tax deductible. It’s important to make sure you aren’t claiming a tax deduction for interest on a loan used for personal reasons.
Business loans can be cheaper than personal loans. This is because lenders make their borrowing decisions based on the potential future profits and cash flow of your business rather than personal affordability criteria. Business loans also tend to be larger than personal loans, which can lead to lower interest rates.
You may be able to borrow a larger amount with a business loan, compared with a personal loan. This is because lenders base their borrowing decisions on strict affordability criteria when you apply for a personal loan. The financial ombudsman is responsible for enforcing rules on responsible consumer lending. Lending will look at your personal income and outgoings, which can be especially hard to predict if you’re starting a small business.
In contrast, applications for business loans are often assessed based on the potential future profits and cash flow of your business. This means lenders considering a business loan application may be prepared to lend a larger amount.
Using a business loan may still affect your personal credit rating. That’s because lenders often assess your personal credit rating as part of the loan application process and report to the credit agency on any loan defaults. Some lenders also ask business owners to personally guarantee a business loan, so they will be financially liable for any defaults on the loan. In this case, a default on the loan would be reported to a credit agency.