Taking on personal credit to clear company debts can seem like a quick fix, but it comes with significant risks. Here are 7 Risks of using personal loans to clear business debts to consider:
1. Personal Financial Exposure
By using personal credit (e.g., personal loans, credit cards, or remortgaging), you are putting your personal assets (such as your savings, home, or other valuable items) at risk if you’re unable to repay the borrowed funds.
2. Increased Personal Debt
Taking on additional personal credit may overextend your finances, leading to difficulties in managing monthly payments. This could result in:
- Higher interest costs.
- Debt spiraling out of control.
- Potential bankruptcy if payments cannot be maintained.
3. Limited Protection
If the company fails despite your efforts, you will still be personally liable for the credit you took out. Unlike company debts, personal credit is not limited to the company’s liability and can follow you individually.
4. Impact on Credit Score
Borrowing personally to cover company debts can damage your personal credit score if:
- You miss repayments on the personal loan.
- You max out personal credit cards.
- Your debt-to-income ratio becomes too high.
This can limit your ability to borrow for personal needs in the future.
5. Strain on Personal Relationships
Using personal resources to cover company debts can strain relationships with family or co-borrowers if things go wrong, especially if joint assets (e.g., a family home) are used as collateral.
6. No Guarantee of Business Recovery
Clearing company debts does not guarantee the company will recover or become profitable. You may end up personally burdened with debt and still face the failure of the business.
7. Legal and Tax Implications
If the company becomes insolvent after you’ve taken on personal credit:
- You might still be liable for unpaid loans or debts.
- Directors could face scrutiny regarding “unreasonable personal sacrifices” if the company’s insolvency leads to formal investigations.
Alternatives to Taking Personal Credit
Before taking personal credit, explore these options:
- Renegotiate with creditors: Seek payment plans or reduced settlements.
- Operational restructuring: Cut costs or adjust operations.
- Seek investment: Look for external funding rather than personal borrowing.
- Insolvency procedures: Consider an SBR (check your eligibility here)
It’s crucial to seek professional financial or legal advice to assess whether taking on personal credit is the best decision for you and your company, and remember whilst very useful, finance brokers are not debt specialists, they are lending specialists. Before considering any type of credit or debt consolidation speak to your accountant or qualified insolvency professional – someone who benefits from you getting out of debt, not just moving it.
