If you are a small business owner, you do enjoy a number of amazing benefits. For example, very few things in live compare to starting a small business enterprise and seeing it succeed.
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Despite the positive elements associated with being an entrepreneur and owing a small business, there are some drawbacks as well. One area in which you potentially can face some challenges is in the realm of obtaining certain types of personal financing. For example, you may be concerned about obtaining a loan to finance a home improvement project.
The Dilemma of No Regular Paycheck
One issue faced by some small business owners is that they lack a regular paycheck. Some small business owners put money in their own pockets when they feel their businesses can afford to pay out in this manner. In addition, there are small business owners that adopt a strategy of compensation taken in ways that legally avoid payroll related taxes.
While these strategies can make sense when it comes to the finances of a small business, and oftentimes even for the owner of a venture, they are not without drawbacks. Nearly always when a personal loan of some type is sough, verifying income is crucial. More often than not, when it comes to verifying income, a lender will have laser focus on a loan applicant’s wage or salary. If you are in this type of situation, and seek a home improvement loan, you can get caught in a dilemma.
You can workaround this type of issue by being proactive and engaging in advance planning. You can pull together verifiable financial information that can support your application for a home improvement loan of some type when you do not necessarily have firm record of regular paychecks.
The More Equity in Your Home, the Better
Another strategy that will enhance your prospects of getting a home improvement loan as a small business owner is approaching a lender with a decent amount of equity in your home. Although the housing market is strong across the country today, there is speculation that housing prices in some locales are inflated.
With this in mind, if you have a decent amount of equity in your home, you definitely will improve your prospects with a lender. The level of equity in your residence needs to not only cover the proposed loan but leave breathing room to cover housing market gyrations that could bring the appraised value of your home downward.
Do Not Pledge Business Assets
A kneejerk reaction to solving the self-employed, small business owner obtaining personal financial dilemma for some people is to try and pledge business assets to support a loan application. A lender certainly may be willing to accept this type of security. However, you should not take this step.
There are a number of important reasons to keep the affairs of your business separate from those of your business. This is the case even if you are the sole owner of your enterprise.
An area that you may not immediately recognize is the fact that pledging business assets for a personal project can cause issues down the road should your business be sued. If you are like most small business owners, you likely have utilized a legal structure for your business, something like a limited liability company.
One of the key reasons you have set up a separate business entity is to protect your personal assets from the reach of creditors, including people who might obtain a judgement against your business. The moment you do something like pledging business assets for a personal loan, you may defeat the wall of separation that previously existed between your business and your personal assets. A creditor, including a judgment creditor, may be put in a position of being able to go after your personal assets, not just those associated with your business.
Local Lenders May be More Amenable to Lending to You
A smaller, local lender may be more apt to provide you a home improvement loan if you are a small business owner. In other words, you should not just focus your sights on obtaining home improvement financing from a major bank.
As an aside, even though you should not pledge business assets to secure a home improvement loan, if you have obtained financing for your business from a particular lender, consider reaching out to that lender if you need personal financing for a home improvement project. A positive track record with a lender on the part of your business efforts may make the lender more interested in extending a personal loan to you.
Jessica Kane is a professional blogger who focuses on personal finance and other money matters. She currently writes for Checkworks.com, where you can get personal checks and business checks.
