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 are in the startup funding stages, it can be difficult to collect funding. First, you dip into your savings account. Then you may seek money from family, close friends, or other interest parties. After a certain point, you’re 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.
In this article, we will go over whether a personal loan is beneficial for your business. Let's go over the positives first.
Why a Personal Loan for Your Business Makes Sense
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.
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.
If you need help getting started — here are some of the most popular lenders for 2022:
Best for Bad Credit
Best for Fair Credit
Best for Good Credit
- Min Credit Score: 560
- APY: 8.49% to 35.97%
- Loan Amount: $1,000 to $50,000
- Min Credit Score: 600
- APY: 6.70% to 35.99%
- Loan Amount: $1,000 to $50,000
- Min Credit Score: 650
- APY: 8.99% to 25.81%
- Loan Amount: $5,000 to $100,000
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 don’t result in asset losses. All it does is impact your credit score.
Other Ways to Secure Funding
If you have a killer business idea or want to develop a product or service — what do you need? Well first the idea, but then money to fund your idea.
There are different routes used to get the cash required:
- Personal Loans
- Cash Advances
- SBA Loans
- Crowdsourcing platforms
- Personal Savings
- Liquidating Retirement Accounts
- Acquaintances (Friends and Family)
The most obvious one is taking a business loan or a personal loan. Typically you won't qualify for a business loan because most lenders require at least 1 year in experience and positive business financial bank statements. Many people resort to taking out small personal loans up to 100K to fund their idea.
The Drawbacks of a Personal Loan for Your Business
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 have a stellar 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 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 and getting out of debt will be a huge task.
When these missteps appear in your history, getting approvals for other financial product applications become difficult too.
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.