17 Jul Should You Use a Business Line of Credit for Personal Use?
One of entrepreneurs’ most commonly asked questions is whether you can use an unsecured business line of credit for personal expenses. The short answer? You can, but you shouldn’t.
When you get approved for an unsecured business line of credit, you gain access to a flexible source of capital without putting up collateral. It’s a powerful financial tool that can help you manage working capital needs, invest in growth, or weather unexpected cash flow disruptions.
But with that flexibility comes responsibility and clear boundaries. Let’s break down why the line between personal expenses and your business line of credit should remain clearly drawn and how to protect yourself.
You’re Open to Personal Liability
You’re afforded liability protections that separate your personal assets from your business obligations if you operate as an LLC or corporation. But those protections rely on you keeping your finances separate.
Using your business line of credit for personal expenses, even occasionally, can be seen as crossing the boundary. In other words, you could lose your liability protection if your business were sued or audited, and your personal assets could be up for grabs in a lawsuit.
Even if you operate as a sole proprietor and don’t have formal liability protection, mingling funds makes your finances more challenging to manage. Your accounting will be messy, and you might accidentally underreport or misclassify expenses, causing damage to your business reputation and credibility.
Tax Complications Aren’t Worth It
The IRS expects you to have clear, documented distinctions between your business and personal finances. Blending the two makes your bookkeeping messy and opens the door to tax headaches and complications.
The most serious complications are tax penalties or interest and failed audits. If you used $3,000 to pay a medical bill in your family with your business line of credit, you must explain the charge to your CPA during tax season. This could lead to confusing and incorrect taxes, which come with fees. The IRS is more likely to audit your business when you have blended your bookkeeping, even if everything is filed correctly.
Using business funds for personal use also means you pay more in taxes. Business lines of credit are often used to fund tax-deductible expenses like inventory, equipment, or marketing. Those expenses no longer qualify for deductions once you have made a personal withdrawal.
Your Lender Probably Prohibits It
Lenders, even nontraditional or nonbank lenders, include specific clauses in agreements that prohibit using the funds in business lines of credit for personal purposes. The enforcement of these clauses varies. If you violate the terms, they could close your account, revoke your credit line, or call in the balance.
No matter the consequences of a breach of contract, using your business line of credit for personal reasons hurts your future business interests. It damages your business credit and your relationship with the lender, making it hard to secure more funding in the future.
It Destabilizes Your Business
Using your business line of credit for personal reasons can have a domino effect on your business in terms of credit building and cash flow. Personal usage doesn’t help your business credit and can hurt your long-term ability to secure more capital. You could also inadvertently create cash flow gaps in your business, especially if the money is spent personally and not replenished in time.
Imagine using your business line to cover a personal emergency, only to find that you don’t have enough available credit to purchase necessary inventory or make payroll. You will unlikely be approved for more credit since your lender prohibits personal usage. Now you have a financial issue with your business, and you may face problems in the future after your credit is hit.
In the long run, you’ll grow your business and personal financial health when you don’t cross the streams. That clarity makes it easier to file taxes, apply for new credit, and avoid financial entanglements that could threaten your success.
Protect Yourself
Maintain the boundaries of your business line of credit and your other finances to avoid personal liability, consequences from your lender, and tax complications. How do you protect yourself and maintain that boundary?
Keep Separate Accounts
Separate accounts for your business and personal finances are the best way to protect yourself. If you often need personal funding, it might be time to focus on building personal credit alternatives, such as lines of credit, loans, or better budgeting practices.
Meanwhile, treat your business credit as sacred territory. Use it for legitimate business purposes—launching a new product, covering operating costs, or investing in marketing—and keep a clear record of every transaction.
Keep Your Business Credit Healthy
When you use your business credit line for business purposes only, you build a strong credit profile that can support your future financing needs. Lenders want to see responsible usage, consistent repayments, and unmistakable evidence that funds are used to grow and sustain your company.
Avoid Easy Access
Unsecured business lines of credit are often easy to draw from. There’s no collateral, and you might even have a business credit card tied to the account. It’s easy to see how you might consider borrowing from your business to cover temporary personal needs. But just because the funds are readily accessible doesn’t mean they’re fair game.
Protect yourself against temptation by making the funds more difficult to access. Leave the business credit card for the account somewhere secure in your office, or avoid getting a card. Set the online banking account so that only your business devices can access it, or avoid an online account and only use the business line of credit through paper transactions. A little difficulty in accessing the funds could save you a lot of trouble in the long run.
In Worst Case Scenarios
Technically, you can use an unsecured business line of credit for personal expenses. There may be situations where you feel like you have no other option. Maybe your personal credit cards are maxed out, your savings are low, and your business line of credit is the only available source of funds. In that case, your best approach is to loan yourself the money or make a payroll draw.
Loaning yourself the money from your business line of credit means writing a loan agreement, outlining the repayment terms, interest (if any), and due dates. You’ll want to keep clear documentation on file and ensure your accountant knows the transaction.
Consider issuing yourself a payroll draw or dividend depending on how your business is structured. Draw funds from your business line of credit into the business account to cover payroll, then issue yourself the needed amount for your personal needs. Always run this approach by a CPA to ensure you comply with IRS rules and minimize tax risk.
But You Really Shouldn’t
Instead of misusing your business line of credit, explore smarter options for personal funding or talk with your financial advisor about properly structuring inter-account transfers. Doing so protects you from risks that can quickly spiral into bigger problems, from tax issues to lost liability protection and damaged lender relationships.
When you keep business credit for business use, you protect your reputation, your bottom line, and your ability to scale.