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How personal debt affects business finances

Posted July 20, 2018 by AGillam to Finance 0 0
This post was written by a EasyFinance.com Community member. The views expressed below may not reflect the views of EasyFinance.com.

Personal debt may have more of an impact on your business than you realise.

Personal debt is a reality for millions of people. It enables us to take big steps forward in life, such as paying for an education or buying a home. Debt is often essential but, before committing to the responsibility of debt, it’s important to understand how it impacts on your life, including on your business finances.

What’s the link between personal debt and business finances?

The most obvious link is for a small business owner who is a key figure in the business. While you might have a legal separation of the business from your own personal finances the two will still have a connected relationship until your business is big enough to stand on its own, financially. According to personal finance experts at Solution Loans, your personal debt could impact on business finances in this context in a number of different ways.

• Investment finance. If you’re the key person in a small business and you have a lot of personal debt then you might find investors are wary of putting cash into your business as a result. They may be concerned about how you will be able to meet your personal repayments without taking their cash out of the business, especially if the business is bootstrapped. Investors may also view large personal debts as a sign of someone who has trouble managing finances, which will also put them off from making an investment.

• Loans and credit facilities. Especially for smaller businesses without much sales history, the decision as to whether to make credit available is often based on the finances of the important people in the business. If those people have a lot of debt then this could negatively impact on a credit score, which will make it difficult to convince a lender to lend. Often, business owners are asked to stand as guarantors for certain types of borrowing like guarantor loans made to the business. If you already have a lot of debt and few assets then you won’t be an attractive guarantor and the loan may be refused.

• Putting pressure on performance. Entrepreneurs often have to borrow money on a personal basis to get a business off the ground. However, those debts could make it difficult to focus purely on improving the business’ finances in order to get the enterprise off the ground. Instead, it may be necessary to continue with another part time or day job to service those debts, instead of focusing on the new business and its financial future.

• Going bankrupt. If your personal debt becomes overwhelming then you may find yourself in a position where bankruptcy is the only option. This can have serious ramifications for business finances and for the role that you are able to play in your own business. For example, you cannot be a company director if your bankruptcy is undischarged – anyone who tries to do this will be breaking the law. So, the consequences of this may mean handling over considerable control of the business to someone else if your personal debt becomes overwhelming. 

About AGillam: The author is a personal finance blogger and writer for a number of websites including the Solution Loans Personal Finance Blog where she writes about the fast-paced changes experienced by Millennials in their lives, careers and personal finances.

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