Loan approvals for small businesses are at an all-time high, with many entrepreneurs opting to borrow money from a bank or private lender as opposed to dealing with the hassle of an online fundraising campaign.
But even with these high approval rates, it can still be incredibly difficult for certain businesses for entrepreneurs to make the cut.
If you have a poor personal credit history if your business is a startup, or even if you have no collateral to offer a lender, you’re likely to be denied for a business loan.
So, what’s the solution? For many companies, it’s a personal loan.
But is using a personal loan for businesses purposes a smart idea?
Read on to find out.
A Quick Overview of Personal Loans
What exactly is a personal loan?
In short, it’s an unsecured loan provided by a lender that doesn’t have any specific requirements about how the money must be spent.
People usually rely on personal loans to help them cover unexpected medical expenses, costs associated with funerals and births, car and home repairs, and more.
Personal loans are usually offered in amounts of up to $50,000, but some lenders will work with you to be able to offer you more than that.
You’ll pay a fixed monthly amount on the loan made up of principal and interest, which makes creating a standard budget for your business much easier.
The Pros of Using a Personal Loan for Business Purposes
Now, let’s talk about why companies — startups in particular — may find a personal loan a better option than a business loan.
First of all, there’s no need to present any kind of business plan or financial projections to the lender. Especially if coming up with accurate estimates and data is tough based on the nature of your business, this can be a huge help.
Additionally, the application and approval processes for a personal loan are much simpler and faster than those of a business loan. It’s easy to get instant approval for personal loans online or to be approved in as little as 48 hours.
By contrast, the approval process for a business loan can easily stretch out into a month or more. When you’re trying to get your business up and running, this is a huge problem.
If you’re concerned that your personal credit score/history will prevent you from being approved for a business loan, then personal loans could be your saving grace.
Many of them don’t even require a credit check to approve of you.
This is especially positive, as even a single credit check can bring your credit score down.
Instead, the lender examines your current forms of income, your current checking and savings account balances, and more.
Finally, personal loans usually don’t require any kind of collateral — meaning that the lender is the one who assumes all the risk if you can’t make your payments on time.
This means you don’t have to worry about the potential of losing your inventory, your office space, or your home or car.
The Cons of Personal Loans for Business
Of course, there are a few drawbacks to funding your business using a personal loan.
The biggest of all these are the high-interest rates associated with personal loans.
Because lenders don’t require a credit check or collateral, the high-interest rates allow them to make a strong return on your loan even in the event that you fail to make payments on time.
The positive here is that many personal loan interest rates are still lower than those on credit cards. Do your research and ensure you’re applying for a loan with an interest rate that you can afford now and in the future.
Additionally, some personal loans can have high application fees attached to them, as well as other fees you’ll need to pay over the life of the loan.
Talk to your lenders and make sure you understand all the fees you’ll need to pay — and that they still make the loan worth it.
Finally, remember that if you fail to pay back your business loan within the stated terms, it’s your personal credit that will suffer the consequences. This means that you could have a much harder time getting approved for a mortgage, a credit card, or even another kind of loan in the future.
The most important part of applying for a personal loan is patience. Always be willing to compare rates, negotiate, examine the fee structure, and weigh the pros and cons of the loan.
Will You Fund Your Business With a Personal Loan?
Using a personal loan to fund your business is a great idea if you have a bad credit history, if you need the money quickly, and if you want to avoid the hassle of having to write a business plan.
Just make sure that you apply for the minimum amount of money you need in order to avoid getting trapped in an endless cycle of debt from high-interest rates. Make sure you compare lenders to get the best interest rate and loan terms possible.
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