BorrowCan I Use A Personal Loan to Start A Business?

Can I Use A Personal Loan to Start A Business?

Business loans can be great cash injections and can provide the seed capital needed to grow your business. However, they are not always easy to obtain, especially compared to personal loans. So, is it possible to get a personal loan and use it for your business?

Since you are considering using a personal loan to start a business, in this article, I will share some things to keep in mind before taking out the personal loan.

It’s no surprise that launching your business requires a certain amount of financing. When you’re starting out, it can be difficult to collect funding to turn your business idea into something tangible. In today’s financial climate, most people will dip into their savings. Then they may seek money from family, close friends, or other interested parties. After a certain point, they are forced to consider alternate options.

Since your business is still in its infancy stage, acquiring a business loan means jumping through a bunch of hoops. I worked at a small business lender for years and small business loans have a lot of limitations, restrictions, and requirements. Sometimes, you may need to provide a business plan, projected growth, and in some cases, submit collateral as security.

This can be especially difficult when you’re planning to launch your business. When it dawns on you that a business loan is out of reach, you can start looking at other financial tools for support.

A personal loan, at this stage, may be an attractive choice. However, before you go ahead with a personal loan, you should consider the benefits and drawbacks.

To begin with, check out the pluses of getting a personal loan for your business.

1. It’s Easier to Qualify for a Personal Loan

Applying for a business loan in the beginning stages of your business is an overwhelming affair. For starters, lenders require your business’ finances with the growth map and more. Since you’re just launching your business, it’s nearly impossible to meet these strict requirements.

The documentation a lender demands a business loan is quite extensive, something a startup can’t show just yet.

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A personal loan, on the other hand, is much easier to qualify for. This is because your lender just checks your credit history and income. Once you secure the loan, there are no limitations on what you can do with the funding you receive.

One highlight is that your credit history and score can impact the interest rates and terms you receive. So if you have a stellar credit history, you’ll get the best deals on a personal loan to help finance a purchase.

2. It’s Easier to Receive Funds

When you finally qualify for a business loan, don’t expect the funds to be transferred to you immediately. The process of disbursing the funds can be painfully long, sometimes even going up to a couple of months.

This can get tricky if you have business needs that require your immediate attention.

It’s much simpler with a personal loan. Once your application is approved, you can expect the funds to be transferred in a couple of days. This way, you can start managing your business expenses immediately. You won’t have to wait for extended periods in hopes of receiving your finances.

3. There’s No Need for Collateral

One of the biggest pitfalls of choosing a business loan is submitting collateral to secure it. This is because lenders require security to clear the loan in case you fail to pay your dues. So missing any payments means your lender will seize your asset and use it to pay the rest of the loan.

This can be extremely risky when you’re planning to launch your business.

One of the reasons fledgling businesses seek unsecured personal loans is because of the lack of collateral required. You don’t have to submit any asset in order to acquire financing from your lender. This means, falling back on your payments doesn’t result in asset losses. All it does is impact your credit score.

4. Low-Interest Personal Loans are Available

If you have excellent credit and have a high income then you could easily get a low-interest loan. Even if you don’t have the best credit, you can still find loans that have low-interest rates when you shop around. Just be mindful of the repayment terms, as a low-interest rate is not the only thing you should consider.

With that in mind, you can enter your credit score on the slider below to see what rates are you available for you with the loan table below:

Now that you know the advantages of choosing a personal loan, you can browse through the disadvantages.

1. You Have to Bear Higher Interest Rates

Lenders tend to advertise low-interest rates on their personal loans to position them as an attractive option. However, you’re required to establish credit history and score to access these low-interest rates.

If your credit score and history is below average, you’ll qualify for a personal loan with higher interest rates. This can cost you a considerable amount of money. It’s best to apply for a loan only if your score and history meet the expectations of your lender.

2. You Get Limited Financing

One of the biggest highlights of qualifying for a business loan is the financing you receive. Now, there are limits on how much your lender can give you. Even then, it’s a huge lump sum that can fund for your business for an extended period.

With a personal loan, you can’t expect that level of financing. The amount disbursed to you may be enough to manage your business’ basic expenses. However, to keep your business afloat, you’ll need to start searching for alternate options as well.

3. Your Personal Credit May Get Affected

It goes without saying that taking a personal loan means putting your own credit at risk. If you start falling behind on your payments, you’ll start raking up a debt. These missed or late payments will start reflecting in your credit history, which then may cause a dent in your score. And if your business fails, clearing that loan will be a huge task.

When these missteps appear in your history, getting approvals for other financial product applications become difficult too.

Another thing you’ll have to consider is the debt-to-income ratio. You may face difficulty qualifying for a car loan, a home loan, or even a credit card.

Can I Use A Personal Loan to Start A Business?

A personal loan works in the favor of fledgling businesses because of the flexibility it offers. The finances you receive can be directed towards stocking up on inventory, paying office bills, buying furniture, and more. Besides this, the eligibility requirements are minimal and the money is disbursed quickly.

However, it’s crucial you go through your budget and your available finances before you settle on a personal loan for your business. Do your research and look for other financing options as well. If you’re planning to apply for a personal loan, then go through all the policy documents thoroughly.

Don’t settle for the first loan you find. Conduct extensive research of the personal loan market and find one that works in your favor. This ensures you get the best deal and not submit poor money apps.

Brian Meiggs
Founder of Smarts, Brian is an entrepreneur and investor who enjoys working out, reading, spending time with his family and friends, playing chess, traveling and creating great content. He’s passionate about helping others make smarter money moves and achieve financial freedom. He uses the free Personal Capital app to manage his cash flow and net worth.

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