Using a personal loan to start a business is a choice a lot of entrepreneurs make. Most personal loans do not restrict you from using the money for business expenses. Because of this, you can apply for a personal loan and use that money to support your business.
There are many pros and cons to consider when deciding whether you should use a personal loan to start a business or pay business expenses. Kat Tretina of Student Loan Hero discussed six factors that occurred to her, including how fast the loan is approved and what information lenders require when loaning money for personal and business loans.
I’ve put together a list of benefits and drawbacks to using a personal loan to start a business. These were important to me when I was deciding whether to take out a personal loan to start a business. You should make sure you weigh the costs and benefits that are important to you and relevant to your business.
Applying and qualifying for a personal loan can be easier than getting a business loan, especially if your business is new. You can even find a lender to get a personal loan for business online relatively easily.
For a personal loan, the lender considers your personal credit history, income, and overall creditworthiness. When you apply for a business loan, you usually have to give the lender detailed business tax returns, financial history, and other documentation that can take a lot of time to put together.
Your personal credit history is often more favorable than your business’s history. You have probably been around borrowing money and paying it back a lot longer than your business has been in existence. That history may help you qualify for a personal loan that has better terms than a new business can obtain.
Because business loans require a detailed examination of the business financials, they take time to process. One of the most popular business loans is the Small Business Administration (SBA) loan, and it can take months for that loan to be approved. A personal loan is granted based on information that is easier for lenders to process. You may be able to get a personal loan to start a business in just a few days.
If a personal loan is easier, cheaper, and faster, why would anyone get a business loan? There are actually some great reasons why a business loan is right for some people. There are important downsides to consider when using a personal loan to start a business.
One of the things that makes it easier to get a personal loan than a business loan is that when you get a personal loan, your own credit is on the line. With a personal loan, you are personally responsible for paying back the individual loan. It doesn’t matter if the business closes—you are responsible for the entire loan amount. If your business doesn’t make enough money to support the loan repayments, it’s your credit score that will suffer.
Every loan you take out makes it more difficult to get the next one. Lenders use a debt-to-income ratio, basically the more debt you have compared to the amount of money coming in the harder it is to get a loan. Whether it’s for your business or not, a personal loan is a debt that can make it harder to get a mortgage or car loan later on.
Even a personal loan with good credit usually will be smaller than business loans. You may have to use a business loan if you need to borrow a lot of money for your business. SMB loans can be approved for millions of dollars while personal loans may only be for thousands. If you think about it, this makes sense. One person is limited in the amount they can pay back by their salary. Businesses’ profits are theoretically limitless and can be based on the work of more than one person.
When I was starting my business, I tried to operate on a shoestring budget and only spend money that I took in. This didn’t get me very far, because it meant that I didn’t actually invest in my own business. I quickly realized that at some point every business needs cash. My little venture was no different.
Where was I going to get funds to invest in my next great idea? I knew I needed a loan, but I didn’t actually know how much money I needed. Before I decided whether to get a personal loan or a business one, I thought about all the ways that a little extra money would help me reach my business goals.
You may find that getting a small personal loan for startup expenses can jump-start your business and help you reach the next level of success. Every business has different needs, and money is at the center of almost all of them. Here are some ways I found that you can use the money from a personal loan to start a business.
It’s hard to make money selling stuff if you don’t have anything to sell. Inventory is a significant expense in any business, especially when you’re paying the manufacturing costs yourself. That’s why crowdfunding sites are filled with new businesses promising extensive discounts to people who pledge to give money before goods are produced. Use a personal loan to finance your next production run, and you can focus on selling your goods on your own terms.
Employees expect to get paid on schedule, even if your last client is late on his bills. A personal loan can help you keep your employees and contractors happy while you wait for your next invoice to be paid.
A personal loan can help your business afford that new piece of equipment to improve your product. It can replace the worn carpet in your reception area. Investing in your business can help you see returns in client satisfaction and retention.
You need money to make money. New businesses don’t have a steady stream of customers bringing in money, and business investment suffers because of it. Using a personal loan to start a business can help you improve your cash flow until your business starts generating it on its own.
It’s hard to operate a successful business out of your house. Whether you’re just starting out or are in the middle of a seasonal slump, paying your rent is a top priority. You can get a personal loan to keep the doors open so that the business has a chance to flourish.
If customers can’t find you, they won’t buy from you. You can use a personal loan to start a business marketing campaign. Research your competition and advertise to the right potential customers.
Licensing requirements, legal fees, and accounting expenses add up in any business. A small personal loan to start a business can help you finance your legal fees and licenses while you focus on getting your first customers.
I first found out that my commercial lease didn’t cover the cost of a new A/C when the A/C went out in the middle of summer. Business expenses pop up at the worst moments, and you can’t plan for everything. Get a personal loan quickly so you can handle your emergency without jeopardizing your business goals.
Getting a personal loan to start a business might be your only option. But if you have an established business, you are probably wondering how to weigh the benefits and drawbacks of a business loan. Is a business or a personal loan better for you right now?
I can’t answer that question for you. What was right for my business may be completely different from yours. Your personal expenses, family obligations, and business needs are important considerations when making your decision. Only you can decide which option is right for you and your business.
You have to decide how much risk you are willing to take for yourself, your family, and your business. Tying your personal credit history up with the success of your business has its risks. Take into account the costs of tying up your personal credit and the risk that your credit will be negatively affected if you default on a personal loan. We all hate to consider the possibility that a business will fail, but many do. Getting a personal loan to start a business may sound like a no-brainer, but if the business closes the loan doesn’t go away. You still have to pay for it.
If you risk nothing, then you risk everything.
Are you going to risk your business because you don’t want to risk your personal credit? Let’s say you decide to try for a business loan. Can your business survive without immediate cash if you’re waiting months for a business loan to be approved?
If you own your business with others, make sure to involve them in any decision you make. Your business agreements may require you to get all members’ approval before taking out a loan in the name of the business.
If you have decided to take out a personal loan to start a business or to sustain one, the next step is how to get a loan. Don’t just go to your bank and take the first offer you get. Before you decide to loan shop for your business make sure you get the best deal.
There are many online loan shopping tools that help you find a lender for your needs. Loanry is a tool that makes looking for loans easy and efficient. Our blog post on the 3 steps to actually getting your loan is really helpful if you’re looking for a personal loan to fund a business.
If you’re like me, you want to know what all your options are before you make your final decision. Before I decided which loan to get, I wanted to make sure I knew what loan conditions I could qualify for personally and what kind my business would qualify for.
Loanry has lots of information on personal loans and also has information on this page for business loans. Here is some of the information I found when researching how to finance my business. I hope that some of it is useful for you.
A traditional business loan is given by the bank to the business entity, not to the people who run or own the business. The only obligations of the loan are the ones the bank sets up. These obligations can be onerous, and traditional loans can be hard for small businesses to get.
Because traditional business loans are so hard for new companies to get, the Small Business Administration works with small companies and solo entrepreneurs. An SBA-backed loan is an alternative type of loan for a business that may not be able to qualify for a traditional loan. You go through a bank or credit union like a traditional loan, but your business has to meet the requirements of the SBA in order to get the loan.
Whether you want an SBA-backed loan, a traditional business loan, or a personal loan, you can go to any credit union or bank for funding. You don’t have to go to the institution where your business has its checking account. I found out that it would have taken take days just to locate all the credit unions and banks that were offering loans in my area. That’s why an online loan shopping tool is a good idea. It does the legwork for you, so you can get to work deciding which loan to apply for.
If you’re fortunate to have funds in a 401(k) or IRA, you may be able to fund your business with a ROBS plan. The Rollovers as Business Start-UP IRA can be used as a down-payment on an SBA-loan or as a fund to pay yourself a salary. You should definitely consult a financial advisor before making this choice. You may need to change your business structure and move around funds in order to avoid tax penalties.
If you want to avoid traditional lending institutions, you can still get a loan from other sources. Peer to Peer (P2P) loans go from person to person instead of bank to person. There are P2P platforms popping up online that connect people to businesses that need cash, and you may be able to find one that can help you.
If you have equity in your house or other real estate, you may be able to use that equity to get a personal loan. By putting up your house or other property as collateral, you may be able to get a lower interest rate on a personal loan to start a business. A collateral-backed personal loan is a secured loan. There are other types of personal loans available, and one of them may help you give your business the boost it needs.
When you consider all your options, you may decide that a personal loan is the best choice for your business right now. Or a business loan may be a perfect solution to expand your company. Compare all of your personal and business loan options, and consider the impact on your business and your personal financial health. I’m sure you’ll be able to make a decision that helps your business thrive. With online tools like Loanry, you have everything you need to find the right loan to meet your current needs and set you up for continued success.
Blaine Koehn is a former small business manager, long-time educator, and seasoned consultant. He’s worked in both the public and private sectors while riding the ups-and-downs of self-employment and independent contracting for nearly two decades. His self-published resources have been utilized by thousands of educators as he’s shared his experiences and ideas in workshops across the Midwest. Blaine writes about money management and decision-making for those new to the world of finance or anyone simply sorting through their fiscal options in complicated times.
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