Taking out a loan, whether for business or for personal reasons, is usually about growth. You want to finance that once-in-a-decade renovation you were dreaming of, or maybe you are looking to expand your family-owned restaurant.
Nowadays, with so many American households having lost one or both of their sources of income, loans can often serve as lifelines.
But should you call your bank about a loan, or search for an online-lender instead? What can you do if you missed out on the government loans for your business? Is it a good idea to get a business loan to cover your personal debt?
To answer these questions and more, we sat down with leading personal finance and lending experts:
- Roger Wohlner - a veteran financial advisor and the owner of the Chicago Financial Planner blog
- Chris Muller - the founder of the Money Mozart financial blog
- Lance Cothern - a CPA and the owner of the Money Manifesto blog to discuss the best options for American families and businesses.
Banks are reluctant to lend, but there are alternatives
With so many families facing financial difficulties, it is no wonder that lenders (boths banks and non-banks) are wary of issuing loans.
But luckily there are plenty of other options available: “One option might be a home-equity loan or a home-equity line of credit - as long as you have sufficient equity in your home. I know that’s getting harder to get now, too. Banks are being more cautious on how many home equity loans and lines of credit they're issuing,” says Cothern.
"Another option, which I’d be very careful with, is credit cards. Sometimes you can get a 0% introductory offer on purchases for 12 or 18 months. But be aware: when that 12 or 18 months ends, or if you make a late payment, or break the terms, you’re going to get hit with the higher standard APR on whatever you haven’t paid off, and that can be 18% or more,” he adds.
If those two options are not a possibility, Cothern suggests a more traditional solution: ”This is one of those rare instances that I would actually suggest considering if you have family or friends that can help. You can set really strong guidelines in place to potentially borrow money from them.”
Stay away from pay-day loans
From the standpoint of borrowing costs, there are two contradicting powers. On the one hand, we have record low rates. On the other hand, the risks to lenders have risen.
According to Muller, loans are actually more affordable now: “I do think that pricing is more favorable, if you can qualify for a loan that you can reasonably afford to pay back, I think it’s an option.”
He noted that the one thing you should definitely refrain from is taking payday loans: “One of the concerns that I have personally, with all of this crunch pushing people into the category of pay-day loans—which I certainly don’t recommend. Previously, they [the regulators] were looking at things like income, rent, student loans, their ability to repay it. Those restrictions have been removed. My fear is that, with the two things happening at once, it could push people into more high-risk categories of loans. Make sure that you understand all of the terms and conditions, and that you can reasonably afford to pay back what you’re taking out in a loan.”
What to do if you missed the PPP train
Until recently, businesses that were facing financial hardships or seeking to grow had a very decent borrowing option: the Payment Protection Program (PPP), managed and financed by the U.S. Small Business Administration (SBA). According to an SBA report from the beginning of August, more than five million businesses were granted an approval and received $525 billion in total.
The last deadline for the application was August 8, and now millions of businesses found themselves locked out of the program (either because they missed the deadline, or because they were disqualified).
However, as Wohlner points out, there are quite a few alternatives: “There’s the EIDL disaster loan, which is Covid-related. Some of the terms are a little different, but that can be up to $100,000. The SBA also offers certain bridge loans.”
“Then there’s a possibility to get an employee retention credit. I don’t know all the terms of this, but they’re mutually exclusive: you can’t do this and get a PPP loan. So if you didn’t do the PPP loan, or missed it, and you meet the terms of keeping these employees on staff, you can possibly get a tax credit for retaining them. Those are all alternatives,” he continued.
Should you take a business loan to cover your personal expenses?
With the lenders becoming more reluctant to issue personal loans, some business owners found a hack: financing their personal needs with a business loan. While this practice may seem effective, it doesn’t come without perils: “I like the idea of taking a business loan for business purposes, but I think when you start bleeding outside the guidelines of the loan, that’s when it’s cause for concern,” says Muller.
“First of all, I would look at the terms and conditions of the loan to see if that’s allowed. I think that people who are doing that now, some may be able to, in the short term, play with it. I personally would not recommend taking that risk,” he adds.
Cothern noted that it may also be risky from a legal standpoint: “If you start mixing your personal and your business money, there’s something called “piercing the corporate veil.” When that happens, your business debts can come after your personal assets, and once you do that, everything’s up for grabs. They can go after your home, your bank account — so you really want to keep your business and your personal [life] separate, so that they don’t have access to those personal assets. That’s only if your business is set up in the correct way beforehand.”