Why You Should (and Shouldn’t) Use a Personal Loan for Your Small Business

Right now, you might feel that a personal loan is the best option when it comes to funding your business idea. Often, new entrepreneurs take this route because when they apply for a personal loan. Your lender will only care about your credentials, rather than those of your business – which can be a relief for those who are just starting out with no success to show as of yet.

Why You Should (and Shouldn’t) Use a Personal Loan for Your Small Business

In addition, personal loan interest rates tend to be lower than that of business loans, making them a good alternative for anybody who would rather pay back less. And, you’re unlikely to be asked to put up any additional collateral like your home, car or savings to secure the funds.

If you’re thinking of starting a small business, a personal loan may seem like a logical approach. We’ve put together some reasons why you should – and why you shouldn’t – go down this route.

#1. It’s Easier to Secure:

There’s no denying that securing a personal loan is a much easier process than getting funding for your new business. All your lender will look at is your personal credit score and history of borrowing and repaying funds. Which means, that as long as you have a good credit score, have been responsible with your debts in the past, and don’t have tons of debt to pay off right now, there’s usually no reason why you shouldn’t be accepted.

On the other hand, getting a business loan carries a far heavier risk of rejection. The lender will want to know all about your business, read your business plan, and consider the expected future growth and profit. They’ll also be interested in your competitors and how you’re going to gain an edge over them.

#2. There’s Usually No Collateral Required:

If you’re worried about collateral, a personal loan could be the best option for you when it comes to funding your small business venture. After insufficient cash flow, insufficient collateral is one of the biggest reasons why banks deny entrepreneurs a small business loan.

Although online or SBA lenders tend to be more lenient and are less likely to reject your application if insufficient collateral is the only thing holding you back, traditional bank loans tend to be stricter and it could quickly become a problem. On the other hand, no collateral is usually required when taking out a personal loan. If you don’t have much in the way of savings or investments, and there’s no option to offer your home as collateral, a personal loan could be the best alternative.

#3. You Only Need a Small Amount:

Starting your own business is quickly becoming more accessible and far cheaper to do. So, you may find that in order to get your business idea off the ground, you don’t need to invest hundreds of thousands of dollars. Maybe all you need is a few thousand to get you sorted with branding, a website, and marketing for a small business that you plan to run from home.

If this is the case, then taking out a personal loan is often the most sensible option. Many banks are reluctant to lend smaller amounts of money as business loans since they yield less interest. However, bear in mind that a personal loan isn’t your only option. You might want to consider a small business loan provider; these are more likely to offer smaller amounts of funding.

#4. You’re Still in the Planning Stages:

If you haven’t yet opened your business doors and started trading, there’s a very slim chance that you’re going to be accepted for a business loan. But what do you do if you need the funding in order to get your business off the ground and make this happen?

Personal loans can come in very handy in this situation because they provide you with the funds that you need to actually turn your idea into a reality. Banks and small business lenders, on the other hand,  need to be confident in your brand before offering you a loan. They will look for a comprehensive business plan, positive cash flow, and a visibly thriving facility before deciding whether or not to part with their money. If you’re nowhere near this stage but need capital to continue, a personal loan can help you out.

#5. Keeping Your Personal and Business Finances Separate:

However, getting a personal loan to fund your business isn’t always a good idea because it stops you from being truly able to keep your personal and business finances separate. This can quickly become a nightmare when you are doing your tax return, for example – your accountant may not be best pleased.

This could also cause problems in the future if you reach a point where applying for a small business loan or business loan from the bank is on the cards. Your lender is more likely to look suspiciously upon tax returns that consolidate both your business and personal expenses.

#6. You Could Jeopardise Your Personal Assets:

Another reason to be wary of using a personal loan for business purposes is that it could put your personal assets in jeopardy if your business isn’t as successful as you’d hoped. If your company finds itself in legal trouble, for example, you could end up paying dearly for it out of your personal funds, regardless of how your company is legally registered.

In addition, you’ll also be held personally responsible if your business does not make enough profit to cover the cost of repaying the personal loan. If you default on a personal loan, even if it is unsecured, your lender has every right to come after your personal assets in order to get back what you owe.

If you’re thinking of starting your own business but need funding to get started, a personal loan can be a great choice. But there can also be some downfalls of taking this route. Do your research and carefully weigh up your options before deciding which type of funding is best for your new brand.

Posted in: Loans