Should You Fund Your Business with a Personal Loan?
During the lifetime of their businesses, entrepreneurs will need money to improve and expand their business. Small start-ups may require funding at the beginning while established businesses usually need additional resources to boost and improve their operations.
Unfortunately, 58% of new businesses experience difficulties with getting loans or credit from lending institutions. It’s easier for lenders to provide business loans to companies that have existed for a couple of years. This leaves most startup owners looking to acquire personal loans for their business needs.
Key Factors to Consider Before Getting a Personal Loan for Your Business
Individuals acquire personal loans to cover personal expenses like education, household requirements, vacation and medical. However, small business owners who have been unsuccessful in acquiring business loans are now using personal loans to finance their businesses.
Consider these factors before you acquire a personal loan for your business:
Unsecured loans have a high-interest rate due to the fact that the lender forfeits collateral. This makes it risky thus the high rates. You can choose to have fixed or variable rates. Fixed rates mean that during your loan repayment period, your monthly installments will stay the same.
They allow you to budget for each month. However, you cannot make extra payments to quicken the process. If you do, additional charges may apply.
Variable rates can change, so your payments are not the same each month. You can also make top-up payments to pay off your debt early.
- Extra Fees
A number of personal loans come with extra fees. Make sure that your lender avails you a fee schedule. It should include all the charges and fees on the loan. Some fees include;
- Application fee; this covers the processing of the application. It’s paid when applying for the loan and refunds do not apply. Your application may still get rejected even after paying this fee. Start with finding lenders who waive this fee.
- Late Payment; to avoid this fee, make sure your payments are prompt each month. Keep in touch with your lender if you won’t be able to pay promptly. They could give you a grace period or accept two installments.
- Personal Loan Origination; this is usually between 1% and 5% of the loan and is charged when the money is disbursed. Some lenders don’t charge it, so do your research.
- Returned Check Fee; if a borrower’s check bounces, lenders will charge for processing
- Prepayment Fee; if you have a 10-year loan which you pay off in 5 years, you will pay this fee because the lender forfeits interest that would have been paid in future
- Check Processing; some lenders charge borrowers who pay with a check
- Personal Loan Credit Insurance; some lenders offer this service so that in case of a scenario where you can’t pay, the insurer pays. The premium is about $1 or $2 every month. However, it is not set in stone. This payment should be made only if the borrower wants to.
- Credit Score
Borrowers with a high credit score present a low risk to lenders. Since personal realistic loans usually don’t require security, the credit score is an important factor that lenders require. Borrowers that present a credit score of 800 and above obtain loans with less interest because they are less likely to default.
It’s a good idea to frequently assess your credit report in case of possible errors that will reduce your credit score. You can access a free copy of your credit report once a year.
The Right Reasons to Acquire a Personal Loan for Your Business
Although acquiring a business loan to fund your business makes sense, there are some conditions under which it may not be reasonable. In case you have just started your small business, meeting the prerequisites for a business loan is far from easy. A personal loan will be the best option under these conditions;
- You need a small amount
Banks usually refrain from loaning small amounts of money to small businesses. The amount of work put into processing a small loan is just as much as any other and yet the yield is so small. If you require below $ 25,000 for your business, you may have to obtain a business loan from alternative providers.
However, you will end up paying high interest rates. In this situation, you should request for a personal loan with low rates.
- It’s a New Business
To obtain a small business loan, you will need a detailed business plan and an operational business with reasonable cash flow. This makes the lenders confident that re-payment will be easy.
If your business is still an idea, obtaining a business loan will be next to impossible. You cannot prove to lenders that your non-existent business will make sufficient income for the repayments.
- Collateral is an issue
Banks usually decline business loan applications for two main reasons; poor liquidity and inadequate collateral. If you don’t have collateral, personal loans are your best bet.
Benefits of A Personal Loan for Your Business
- Easy Eligibility
Acquiring a personal loan is not a long and elaborate process like a business loan. Lenders simply require your current financial statements and credit history.
- Monthly Installments
Repayment installments are made every month. This allows the borrower to organize their finances in advance and see to it that payments are made in time.
Lenders do not impose stringent criteria on the use of the loan. You are at liberty to use the money whichever way. You can invest a portion of it in the business and use the rest for personal purposes.
- Low Annual Percentage Rate (APR)
If you have a good credit score, you qualify for a low APR. Personal lender have 6% APRs.
The Downside of Personal Loans
Personal loans restrict the funds you can borrow. The maximum amount for most providers is $50,000. A handful of them will lend up to $ 100,000. Business loans provide up to $ 1 million.
For business loans, the interest on the loan comes with a tax reduction. With personal loans, that is not the case.
If your business misses or delays payments, this will have a detrimental effect on your personal credit. Overdue payments will land on your personal credit report.
What About Business Loans?
Business loans are meant just for the purpose of business. This can include opening at a new location, purchasing new equipment or renovation, whatever advances the business.
Maybe your business has been operational for a while, is sound and has an impressive past performance, but it has a distinctive need that requires financing. A business loan is your go-to option. A personal loan may not meet your exclusive business needs.
This loan boosts commercial credit for your company. This can lead to high lending limits, better lending terms and increased funding from providers at a later time. When your business has a great track record of paying your debts, it builds financial reliability.
Another merit of this loan is that you will manage your personal and business finances independent of each other. You can separate financials for your business while monitoring income and expenses. This strengthens your business credit.
Unlike personal loans that are typically never below $ 50,000, business loans can be more than $ 100,000 up to $ 1 million, making sure you cover various business essentials.
Filing your taxes is easier with a business loan. Any fees and penalties you incur on funds acquired for the business or assets you buy for the business are deductible.
The pitfalls of business loans include the following:
- Lenders favor established profitable businesses with solid business plans
- The application process is rigorous, requiring lots of paperwork
- Long waiting time for approval
- Strict conditions on how to use the money
- Collateral to limit risk
Decide the Best Funding Option for Your Business
Being the right candidate for a business loan means a month of prior planning. You must present a compelling business plan and show lenders that the company is generating enough money to make repayments. This funding option will build your business credibility and ensure a seamless tax filing process.
But what about if you don’t have an established business yet? A personal loan could go a long way in growing your company. It still requires careful planning and research. They are easier to get, cheaper and flexible. What option makes sense for your business needs? The decision is yours to make eventually.