What’s The Difference Between Business & Personal Financing

For small businesses, there isn’t much if any difference between the two.

There are a couple of  key reasons for this.

From a credit point of view, small businesses, especially new ones, don’t have much in the way of business credit established.  So lenders will rely on personal credit scores and histories to make business financing decisions.

Even if a small business has been in existence for several years, there still is no guarantee that any amount of business credit will have been established due to the fact that a business credit history is developed by transacting with companies that not only offer credit terms, but also report outstanding credit to credit reporting agencies.  Many small businesses either don’t utilize much supplier credit, or way only work with suppliers that are too small to be actively reporting to credit agencies.  The result in both cases is that business credit does not build much over time.

From a guarantee point of view, most small business financing facilities will require a guarantee from either the business itself or the owners of the business.  If the business itself does not have sufficient retained earnings to provide meaningful value to a guarantee, then a personal guarantee will be required.

Many business owners get frustrated with the fact that even though they are incorporated, they still have to open themselves up to liability personally by having to provide personal guarantees to secure business loans.  Unfortunately, incorporation can be more important for tax reasons than liability protection, especially when it comes to securing business capital.

Over time, as the business earns profits and grows its retained earnings, then personal covenants and guarantees may not be required and can even be removed from existing financing facilities.

The key though is to increase the value of the businesses ability to repay debt obligations.  If the owners are always striping out the available cash from the business, then the personal guarantees will likely continue to be required due to the fact that the personal side is where all the equity value is being held.