Business borrowing vs personal borrowing: keep them separate

In small businesses, the line between business money and personal money blurs easily. The business card pays for dinner. Groceries come out of the trading account. A client pays into your personal account because it’s the one they had on file. It feels harmless — until you need to borrow, and nobody can tell what the business actually earns.

Why the purpose of a loan matters

Business lending and consumer lending are different worlds in New Zealand. The lenders we work with provide funding for business purposes only — not personal or consumer loans. So the first thing any business lender wants to know is what the money is for.

Business purposes include:

• Stock, materials and supplies.
• Equipment, tools and vehicles used in the business.
• Wages, PAYE and other employer costs.
• GST, provisional tax and other business tax.
• Rent, fit-outs and premises costs.
• Buying a business or a share of one.
• Refinancing existing business debt.
• Bridging cash flow gaps.

Not business purposes:

• Holidays, household bills and personal credit cards.
• A family car that isn’t used in the business.
• Renovating the family home.
• Personal debt consolidation.

If a loan mixes the two, it’s usually not something a business lender can do. Be clear about purpose from the first call.

Security vs purpose: a common confusion

Using your home as security doesn’t make a loan personal. What matters is the purpose. A property-secured business loan from $20,000 to $1m can be secured on your home, a rental, commercial property or land, and it’s still a business loan because the money is going into the business. Our answer on borrowing against your house for your business explains how that works.

Why separate accounts make borrowing easier

For unsecured business loans and lines of credit, lenders size the loan to turnover and bank statements. They read your business account to see what comes in and what goes out. Our guide on what lenders look for in bank statements explains the detail.

When business and personal money are mixed:

• Turnover is understated. Takings that land in a personal account don’t count.
• Costs look higher. Personal spending from the business account looks like business expense.
• Conduct looks messier. Personal direct debits bouncing on the business account look like business dishonours.
• Questions multiply. Every unusual transaction needs explaining, which slows everything down.

When they’re separate, a lender can see the business clearly — and usually offers more, faster.

How to separate them (it takes an afternoon)

1. Open a dedicated business account if you don’t have one. For companies, it should be in the company’s name.
2. Update your invoices so every client pays into the business account.
3. Move all business direct debits — suppliers, software, insurance, phone — to the business account.
4. Move all personal direct debits off it.
5. Pay yourself properly. A regular transfer — salary through payroll for a company employee, or regular drawings for a sole trader — instead of ad-hoc spending.
6. Get a separate business card, and only use it for business.
7. Open a tax savings account for GST and income tax. See our GST and provisional tax guide.

Companies: a special note on the shareholder current account

If you run a company, money you take out that isn’t salary or dividends often goes through a shareholder current account. If that account is overdrawn — you’ve taken more than you’re owed — it can have tax consequences and it’s something lenders notice in financial statements. Talk to your accountant about keeping it in order.

Sole traders: separate but the same

A sole trader is legally the same person as the business, so the separation is practical rather than legal. It still makes a big difference to lenders, Inland Revenue and your own peace of mind. See our answer on whether a sole trader can get a business loan.

The reverse problem: business costs on personal cards

Mixing runs both ways. Many owners pay business costs — fuel, materials, software, a supplier who only takes cards — on a personal credit card, especially early on. It creates three issues:

• Business costs are hidden from the business bank statements, so the business looks cheaper to run than it is — until the lender reads your personal statements too.
• GST claims get missed when receipts end up in the wrong place.
• Personal credit utilisation rises, which can affect how lenders view you as a guarantor.

If this has been happening, tidy it up in the same afternoon: move recurring business subscriptions to a business card, reimburse yourself properly for past business spending with your accountant’s help, and keep receipts together.

What if things are mixed right now?

Don’t panic, and don’t delay a funding conversation because of it. On the call:

• Tell the specialist which accounts contain business income.
• Offer statements for all of them.
• Explain any large personal transactions.

If property security is available, the initial assessment doesn’t rely on financials or tax returns, so mixed accounts are less of an obstacle. For unsecured funding, a few months of clean separation before applying can improve the amount offered.

Talk to a specialist

Ring the Hotline and tell us how your accounts are set up. We’ll tell you what lenders will make of them. Or request a call back.