Business owners often find it difficult to access funds. As a result, growth in your business is restricted. Online lenders have made it easier for many businesses to get business loans, but startups seem to miss out on these opportunities.
Lenders tend to shy away from startups because they lack any operating history. As a result, business owners seek other opportunities such as loans from family and friends and VC funding which can be difficult to secure.
There’s one other option that could come in handy for a young business: Personal loans. Many entrepreneurs use these loans to finance their business operations. Securing the loan is easy because all you need is good credit; your business is not important.
However, is taking a personal loan the right move?
In this article, we take a look at the differences between the two types of loans and when to use a personal loan for the business.
Personal and Business Loans: The Differences
A business loan is extended for the sole purpose of funding a business. Funding for payroll, renovations of premises, restocking, opening a new location, etc., Comes in various forms.
Lenders use the business’s reputation and cash flow to assess the risks involved. Since business loans involve huge amounts of money, lenders often look for reduced risks in a business. This means one with a good credit, including the business owner
Unsecured Personal Loans
This type of loans will only apply to individuals instead of businesses, unlike the case in business loans. These loans cater to personal issues like medical expenses, education, home matters, and the like. Depending on the lender which can be find with www.nation21loans.com, you can also use this type of loan to expand a startup.
Lenders will use your credit and income to determine if you qualify for the loan and the rates involved. If you have a poor score, you’ll encounter difficulties in convincing the lender to approve your request.
One of the biggest advantages of these loans is the freedom to use the funds as you wish. Since the loan is personal, you don’t have to provide as much information as you do in business loans. Furthermore, most of these loans don’t require any security, hence the title unsecured personal loans. To top it off, personal loans have low-interest rates.
Why You Shouldn’t Use Personal Loans for Business
You Put Your Credit on the Line
If you decide to take a personal loan for a business, you risk your own credit. Should the business fail or fall behind schedule on payments, your credit score will take the hit. Remember, a poor score and a series of late payments will hamper your efforts if you need to apply for other loans in the future.
Even though you make all payments on time, these loans can still damage your credit in other ways. For example, taking a loan will raise your debt-to-income ratio. A high number for that ratio means you will have difficulties in obtaining other loans such as car loans, mortgages; it might even deny you a new credit card.
Limits on How Much You Can Borrow
A Small Business Administration (SBA) loan offers a maximum of up to $5.5 million, which is good money if you intend on expanding your business. On the other hand, if you take out a personal loan, you’ll have to deal with various monetary caps, depending on the lender.
In most cases, they won’t give you more than $100,000, a small amount of money if your business requires more than that.
High-Interest Rates
But personal loans have low-interest rates? True. Well, they are only for those with spotless scores and those with sky-high incomes. If you have a less than glamorous credit or your salary is low, then you’ll have to make do with higher interest rates.
For example, let’s say you borrowed $25,000 with a repayment period of 5 years with a 5 % interest rate. At the end of the 5 years, you’ll pay $25.307.
Some interest rates go as high as 35%, which can be unsustainable in the long run. If the interest rates rise to 35%, with all other factors remaining constant, you’ll pay a whopping $53,235. What you’d pay is double what you borrowed— courtesy of the interest.
When Should You Use a Personal Loan for Business?
First of all, you need to have good credit, including a good credit-to-income ratio. The second number should be at no more than 46%, while the first should fall at 600 or higher. If you score well in both, you should have it easy when requesting a personal loan.
However, if you intend on using a personal loan for business purposes, you’ll have to confirm with the lender if they allow it. Moreover, it’s good practice to separate your business and personal finances because it’s easier to do bookkeeping and filing taxes.
Here is why you might opt for a personal loan for business:
• You don’t have a business yet: Lenders rarely offer loans to startups. If your business is in its baby steps and you haven’t generated any revenue yet, you can use this loan to kick start your business.
• You own a risky business: One such business is food service. Businesses in such risky industries find it hard to secure business loans from lenders. Instead, you can apply for a personal loan instead of using the credit score of your business or its creditworthiness.
• Personal loans cost less: This will only apply if you have a low credit-to-income ratio and a good credit. It’s a good move if your business doesn’t meet certain criteria—such as creditworthiness—to qualify for a business loan.
• Your business revenues don’t allow it to qualify for a business loan: You might be open for business, but the revenues disqualify it for a business loan. In such a case, you can apply for a personal loan to cover cash flow issues and operating costs as the business grows.
Conclusion
You can opt for other ways to fund your business, such as bank loans, SBA loans, and business credit cards. However, the answer to whether you should opt for a personal loan is in the business itself.
Take a look at the revenues, how old the business is, and its creditworthiness before applying for a business loan. With these tips, you should be able to come to an educated conclusion.
