Entrepreneurs starting a new business may consider taking out a personal loan to cover their start up business expenses. This can be an option as most personal loans do not restrict using the funds for business related expenses. There are many things to consider before pursuing this funding option.
Benefits of Using a Personal Loan for a Business
Every business needs funds to operate from time to time. This is particularly true when the business if just starting up. Personal installment loans for a business may be a good option but every business person needs to consider all of the available options.
It is often easier to apply and qualify for a “personal-loan-to-start-a-business”. This is particularly true when the business is just starting up and has a limited history. Applying for a business loan requires the owner to submit the business’ financial history and tax returns. In applying for a personal loan, the individual’s credit history and income are considered by lenders. In this instance, a personal loan is much easier to apply for.
When looking to get personal loan online, the lender will look at the credit score and history of the applicant. In most cases, these will appear more attractive to lenders than a startups limited financial history. It will also translate into the better terms and interest rate than the business could secure.
Today, there are online platforms that connect lenders to those seeking to get personal loans online. In most cases, a personal loan can be secured in a matter of days. Business loans take much longer to be processed because of the level of scrutiny required to process the financials. Small Business Administration (SBA) loans are common for new businesses but they take several months to receive an answer.
Disadvantages of Getting a Personal Loan for Business Needs
The reasons for using a personal loan may sound attractive but there are also disadvantages that should be considered. For some businesses, a conventional business loan may be the better course of action.
Paying It Back
Regardless of whether the business is successful or not, the personal loan must be paid back. If it can not be paid back by the business, the business owner will be responsible for covering it with their own personal funds. Their credit is at stake.
Limits to Future Borrowing Ability
When using the approach “personal-loan-to-start-a-business”, personal loans are used for business expenses, it can make it harder to get a loan in the future for a house or car. This is because lenders consider each applicant’s debt to income ratio. While the loan for business is being paid off, it will be more difficult to secure loans for personal expenses.
Business Loans are Bigger
An individual application for a personal loan will be significantly smaller than a business loan. For instance, SBA loans are often for millions of dollars. Personal loans are generally for less than $10,000 because they are based on the individual’s ability to repay the loan.
How Can a Personal Loan Be Used for a Business?
The funds for a personal loan can be used to help a business reach their next level. There are many ways that they funds can be used to support the operation. These include inventory, employee wages or contractors, office or warehouse rental, furniture, equipment, advertising and marketing, and accounting or legal fees. Two other considerations are that it will give the business some cash flow and cover any unexpected business expenses.
Before deciding which loan option is best for their business, it’s useful to consider obtaining funds from other traditional sources. These can include the local bank or credit union, peer to peer networks, home equity loan or 401k.
Loanry is a network that connects lenders with consumers seeking loans. Individuals can do personal loan shopping to find loans from competing lenders. This allows people to compare rates and terms to get the best deal for their needs. To be clear, Loanry is not a lender. It is a platform that seeks to educate consumers and lets them shop personal loans.