What Happens If You Use a Business Loan for Personal Expenses?
You shouldn't use a business loan for personal purposes. It violates your loan agreement and can have negative consequences for your company.
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Key takeaways
You shouldn’t use a business loan for personal expenses.
Using business loan funds for personal expenses violates your loan agreement and can lead to financial, tax and legal consequences.
If you need cash for personal expenses, consider paying yourself from your business, using a personal credit card or a personal loan.
When cash is tight, it can be tempting to dip into your business loan to cover personal expenses like mortgage payments or groceries. But doing so can violate your loan agreement and put you and your business at risk.
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Once we uncover your personalized matches, our team will consult you on the process moving forward.
Consequences of using a business loan for personal expenses
You may face financial, tax and legal consequences.
Breach of loan agreement
Business loans are meant to be used for your business. This is typically outlined in your loan agreement. If you use your business loan for personal expenses, you’re breaking that agreement. This could lead to loan default and your lender might demand full repayment immediately — something that many small businesses can’t afford to do on short notice.
Example: Wells Fargo Business Line of Credit agreement that specifies business use.
Future funding problems
Tapping into business loan money for personal expenses can hurt your chances of getting approved for future loans.
If you default, this can harm your credit score, making it harder to get financing. Violating your loan agreement can also damage your reputation with lenders.
When you apply for a loan, lenders often check your business bank statements. Personal transactions or unexplained withdrawals can raise red flags and lower your chances of approval.
Tax issues
Mixing your personal and business finances makes your bookkeeping and taxes more complicated. It also makes your business tax deductions harder to justify to the IRS.
Usually, you can deduct interest paid on a business loan. But if you use any of your loan funds for personal expenses, you might lose that deduction.
If you claim a business loan interest tax deduction anyway, the IRS may count that money as personal income, which may lead to more taxes, penalties and even audits.
Legal exposure
LLCs and corporations offer limited liability, meaning your personal assets are protected from creditors trying to collect from the business. However, mixing your business loan funds with personal spending can jeopardize this protection by creating a situation called “piercing the corporate veil.” If this happens, your personal assets could be at risk if you’re sued or declare bankruptcy.
Using business funds for personal expenses can also lead to claims of fraud or misuse, especially if you have partners or shareholders. These claims can lead to fines, legal fees or more serious consequences.
“At the end of the day, business owners don’t get in trouble for running lean, they get in trouble for running loose. Keep those lines clean and you protect not just your company — but your reputation — and that’s something no loan can buy back.”
Ethan Aiem
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CEO of Klendify
Alternative ways to cover personal expenses
If you need cash to pay your personal expenses, don’t use your business loan. Instead, you can consider:
Paying yourself
Paying yourself as a business owner is the appropriate and legal way to use business funds for personal expenses. You can pay yourself in two ways:
Salary. You can pay yourself a regular salary just as you would any other employee of the business. You pay yourself a “reasonable” salary — meaning it’s comparable with someone else doing the same job in your industry — and withhold taxes from your paycheck.
Owner’s draw. You take money from your business profits when needed. The amount you can take depends on your owner’s equity (the money you’ve invested in the business and any profits that haven’t been spent). You don’t have to pay taxes every time you draw money, but you should regularly set aside money for your tax bill.
Make sure you accurately record payments and transfer the funds from your business to your personal account to avoid accounting and legal complications, like those we discussed above.
Personal credit card
A personal credit card can be a quick and easy way to cover personal expenses — as long as you can pay your balance at the end of the month. If you can’t, you’ll be charged interest on the balance, which increases your costs.
Personal loan
If you need to cover larger expenses, such as home renovations or wedding costs, you might get a personal loan. With a personal loan, you receive a lump sum of money from a lender and repay it with interest. Eligibility is based on your personal credit history and finances.
» MORE: Business loan vs. personal loan