Getting a loan for a new business is tough, so many people decide to borrow a personal loan to get their company off the ground. If you’re starting a new business or in need of some cash, a loan may be your best option.
While it may be a better way to distinguish your personal and professional finances, business loans are harder to obtain. Financing a small business is tough, especially in the beginning, so going the personal route seems like the obvious choice.
Before you look into lenders, it’s important to research and understand the pros and cons of borrowing money for the business. Read on to discover the advantages, disadvantages, and process of getting some financing for your company when a business loan isn’t an option.
If your company is under a year old, you most likely won’t qualify for a business loan. When lenders offer money to a business, they need to see a well-documented track record of financial success. Without growth and a steady cash flow, lenders won’t see your business as a worthwhile investment. Lack of funds can translate to an inability to repay a loan in a lender’s eyes, so using a personal loan to finance your small business is a much easier route.
Because personal loans are taken out in your name, how you use the funds is entirely up to you. You could apply it to purchase real estate, hiring new employees, buying new equipment, advertising or other needs. You won’t have to write out a business plan or explain the ins and outs of your company’s background in order to qualify for a personal loan. Instead, lending for these types of loans relies mostly on your credit score and job status.
Every lender has its own qualifying criteria, but almost every credible loan servicing agency will require you to have a good credit score and show a verifiable proof of income. If you are unemployed, getting a personal loan may be trickier. Some people give up everything to open a new business, so showing a steady income when you’re struggling to launch a new company is a challenge.
In those cases, you may want to turn to family or friends for assistance. Borrowing from people you know cuts out the middleman, takes away or at least significantly decreases interest rates, and usually gives you some more flexibility and lenience when it comes to repayment.
If you decide to go the traditional route, you’ll have to prove that your credit is in good standing and that you have a reliable source of income to repay the capital you borrow. A good credit score is anything above 700. You build credit by repaying your credit card bills, student loans, and any other debt consistently and on time.
Bad-credit personal loans exist, but they’re highly discouraged because of their exorbitant interest rates and penalties. Many payday loans, for example, promise money to borrowers right away, but the catch is you have to repay the loan by your next paycheck, which is typically two weeks to a month. People who fail to meet the repayment deadline face high-interest rates, late fees and other penalties that only worsen their credit score and make their debt even more unmanageable.
If you have no credit or bad credit, consider private loans from family or friends instead. If you’re currently repaying previous loans and other debts while waiting for your credit score to improve, consider loan consolidation. Combining all of your outstanding balances into one lump sum that you can pay off over time will speed up the repayment process and help repair your credit score more quickly.
If your business is just getting started, you might not qualify for a business loan or business financing. While the latter helps establish cthe apital for your business, getting approved without a solid history is next to impossible. If you need money to launch your company or you only require a small amount of financing, personal loans are a safe and secure option that are easier to acquire.
You shouldn’t rush to apply for a loan, however, if your business is struggling or you don’t foresee yourself having the means to repay on time. Desperate times might call for desperate measures, but rash decisions, especially when it comes to finances, can have serious consequences that destroy future opportunities.
Ask yourself the following questions to help determine whether you should borrow a personal loan for your business:
There’s a lot to consider when it comes to financing your startup. A business loan offers some cushioning against the harsh penalties of late repayments or defaulting. Personal loans, on the other hand, are entirely in your name and impact your credit score if you can’t pay off your balance and any interest on time. A poor personal credit score will impact you in many ways outside your business such as buying a house or getting a new car.
A line of credit is a type of business financing favored by many people. With a line of credit, you only take out money when you need it and only have to pay back what you use. For example, if you get approved for a $15,000 line of credit and only use $5,000 to purchase some new hardware and upgrades for your business, you’ll only be required to repay that $5,000 plus interest. You’ll still have access to the remaining $10,000 before you pay back the original debt, and once you repay the $5,000, you’ll have access to the full $15,000 again.
Lines of credit offer a safeguard of sorts. You know you only have access to a set amount of money, so you won’t unintentionally take out far more than you’re capable of repaying.
Lending services offer a variety of personal and business lines of credit for you to consider. Check with your local bank and the Small Business Administration before you take out anything in your name. While you may be required to put up collateral for a small business, this safety measure also helps ensure that you don’t attempt to borrow beyond your means and only make the wisest financial investments.
Applying for personal loans is straightforward and easy. Most of the time, you can apply online and get approved the same day. The application process only takes a few minutes, but you’ll need to provide copies of the following:
As long as you can confirm your identity, a source of income and a decent credit score, getting approved for a personal loan from a private lender or your local bank is usually simple.
If you’re approved, the money from your personal loan should be available within a few days. Small business loans, on the other hand, can take weeks or months to be approved. There’s a lot more involved when it comes to getting approved for a business loan, and you’ll also have to offer up some form of collateral in most cases. For those who have an uneven cash flow or a business that hasn’t really taken off yet, collateral is either too risky to wager or nonexistent.
Personal loans give you the advantage of accessing much-needed cash without risking your entire operation. If you’re only borrowing a small amount, repayment should be easy and, in the long run, help you improve your credit.
If you take out money in your name to fund your business, there are some downsides. For starters, the limits tend to be a lot smaller. You can get an SBA loan for up to $5.5 million, but personal loans usually cap out around $100,000. Depending on your credit score and income, this maximum amount may be even lower.
Interest rates for personal loans also tend to be higher, and the repayment periods are shorter. Those with bad credit scores and a low income may face interest rates as high as 35 percent. A $20,000 loan with a five-year repayment plan and 35-percent interest rate total a staggering $42,588.37. When you’re already low on funds or relying on loans to finance your business, agreeing to repay nearly double what you borrowed is a huge gamble and could be financially devastating in the long run.
Your best bet when it comes to financing your business on your own dime is to research. Talk with your bank first and see what types of loans or lines of credit they offer. You may find that your business, although new, still qualifies for a business loan that can protect your name and credit. Some lenders even offer startup loans for up-and-coming businesses.
If you’ve decided to go the personal route, make sure you don’t agree to any loan that exceeds what you’re able to pay back within the given time frame. Calculate your monthly payments and total balance, including interest, before you borrow by using a free online loan calculator like this one from Bankrate.
Think of any money you borrow as an investment, not just a loan. You don’t just want to repay what you took but instead see a profit. Fine-tune your business strategy and project how your added funds will build your business. When you take the time to plan ahead and work with multiple scenarios, you’re less likely to borrow too much or overspend on nonessentials.
Understand your own personal finances before you apply. A lot of lenders pull hard credit reports, which can lower your score and make it difficult to get approved by other companies in the future. With a solid business strategy and some careful planning, you can find the right method to finance your business and grow.
Chris Fuller went to the University of South Florida and has worked in the financial sector for over 20 years. He has extensive experience in all aspects of personal and small business lending, from personal loans, equipment finance to cash flow based solutions for small mom and pop businesses, and large corporations.