Loan Officer is pushing personal credit cards on me for business use

[Videos for Businesses]

I've always heard mixing business and personal credit is a bad thing. Am I wrong? I told her I'm in a hurry so she said the best option would be to get the personal credit cards and she's offering to approve me up to 75% of what I was asking for in the business loan.

[lucas.bowser]

When you're starting a business, your personal credit is often your only credit. Banks tend to lend to established profitable businesses or people that are willing to put a personal guarantee on the loan (which is still your personal credit being extended.)

You just need to make sure you keep it clean in your books so that it's clear you are running your business as a business. Especially if you are incorporating your business, otherwise your personal protection can be compromised in the case of law suits, creditors, etc...

[vangogh]

If your business is registered as a sole proprietor then it doesn't make a difference, since you and the business are really one in the same. It's still a good idea to separate your business and personal account as Lucas suggested, because it makes things easier on your, especially at tax times. If your business is set up as any kind of corporation then you do need to keep the separate beyond just the bookkeeping. The idea of a corporation is that you and the business are different entities, which is hard to justify if both use the same credit cards.

Even if you are a sole proprietor it's a good idea to have separate bank accounts with separate credit cards etc. It'll help you keep the bookkeeping separate and also prepare you in case you later change to a corporation.


I told her I'm in a hurry

This could be a reason why the loan officer is pushing the personal credit card. The less time you have to get something set up, the less options will likely be available to you. If you absolutely need to have everything set up right away take what the loan officer is offering. Then look into other options you can set up longer term.

[Videos for Businesses]

Thanks for your responses, here's exactly what she wrote me. By the way, my company is set up as an LLC

"In case I get busy with my clients appointment. I highly recommend that we get started with our personal visa and mastercard to purchase your equipment while waiting to get an approval on the business credit card. Both cards are great but the personal card will give you 0% for 12 months versus the business credit card 0% for 6 months. The only difference is how you would record the expenses. From our initial conversation you stated you needed approx. $20K to purchase equipments for your business. I am one of a few managers who has the ability to approve personal credit cards up to $10K so my plan is to get you as close to $20K. Base on your credit I can give you a $10K mastercard and a $5000 visa card with 0% interest for 12 months same as cash. This will save you money and you can begin purchasing your equipment as soon as the cards arrived. Pls let me know and I will begin getting the card shipped out as soon as possible. Thanks."

[lucas.bowser]

That seems like a reasonable approach so long as you feel your business can generate the cash flow to pay it off in the 6 and 12 month periods or that you will be able to refinance into a different product that carries a reasonable interest rate at the end of the introductory rate.

One of the gotchas with these introductory same as cash rates is often that if you don't pay it off by the end of the introductory rate you are retroactively assessed the regular interest rate on the balance that you haven't paid off. So if you use it like a free 6 months with no payments, you often have a large bucket of interest dumped on you at the end. Just make sure you understand the repayment terms of the cards and that you can handle them if your not able to refinance into something better at the end of six and 12 months respectively.

[vangogh]

If your company is set up as an LLC I don't think you should mix personal and business cards. A big point of setting up as a corporation is to separate business from personal. You're claiming you and the business are different and so you shouldn't be liable personally for things the business does. The protection of an LLC is limited, but still it's hard to argue that business and personal are separate when you're using a personal credit card to directly make purchases for the business.

You'll probably need to buy the equipment personally and then sell it to the business or lease/rent it to the business.

Some questions.

Do you really need $20k for equipment? What are you planning on buying?

Is there a reason you can't wait for the business card? How long is the approval process?

[lucas.bowser]

It's perfectly fine to use personal cards for business transaction without disrupting the LLC structure, but you must recognize the personal card use in an appropriate manner. In this case, the incorporating documents should be written/ammended to show that his contributed capital includes the purchase of this equipment. This will move the asset into the business while maintaining the corporate structure. This will still remain a personal liability until he makes a distribution back from the business to pay off the cards. If he does this, he needs to make sure the appropriate accounting transactions are being made to reflect the capital contributions and subsequent distributions. This maintains the integrity of the business.

This type of arrangement is typically used when the business doesn't have sufficient credit established to get a loan or credit card, or a new business is being established in order to do the initial capitalization, or capital for expansion. Ideally, if this is an established business, then the loan/card should be held in the company's name so that there is no question about liability for the debt (business or personal.) What you absolutely shouldn't be doing is regularly using credit cards to finance the operating expenses of the business on an ongoing basis. This indicates that the business is too thinly capitalized and you potentially subject yourself to personal liability risk. The idea is, when you set up your LLC, that the business has been given everything it needs to operate as a going concern without subsequent capital commitments or owner paid expenses. This becomes tougher, but not impossible, to do when you start commingling business and personal funds. The reverse is also true when you take an abnormally large equity distribution from the company. If you put yourself into a position that you will have trouble continuing as a going concern, you will also compromise the llc.

My advice,

[lucas.bowser]

Not sure what happened above. Should have finished:

My advice, wait for the business loan, if it can be taken out in your company's name without a personal guarantee. This is by far the cleanest and most preferable way of obtaining debt financing. The only reason I would compromise on this is if you have a contract lined up already that requires the equipment in a quicker time frame than what the bank can operate in for a conventional loan, or the deal that you have on the equipment is so good that you may never get that opportunity again. I was assuming one of these was the reason for the urgency in obtaining the financing.

[lucas.bowser]

There is nothing illegal about what the loan officer was doing. So long as you meet the lending criteria, they can offer the financing. First, there is nothing illegal about using the personal card for business. It's perfectly legal and is done all the time. The number of businesses started using personal credit probably number in the hundreds of thousands each year. But it can get you in trouble civilly if you don't maintain the proper documentation and incorporated as an LLC, S-Corp, LLP, etc...

[Pss]

I realize this is an old post, but thought i'd chime in. I agree with others that you can resolve the accounting issues. My biggest problem with it is that it doesn't get you any closer to good commercial credit. When your business gets going, instead of an installment loan that is getting paid off, you have two maxed out credit cards. This could dramatically affect you credit score and make it harder to get your next round of expansion funding.

If you can get a small installment loan, even at higher rates, you might be better off in the long run.