Taking on debt is normal when you’re starting or expanding a business. However, borrowing money or getting a loan can be difficult, depending on your company’s financial situation. The good news is, there are personal loans that many business owners pursue when they don’t have enough money to finance their business undertaking.
It’s important to note, though, that this type of financing may not be a good fit for everyone. That’s why you must understand how it works and what are its potential advantages and downsides.
We’ve put together a few essential points below to help you figure out whether or not you should take out a personal loan to fund your business.
What Is A Personal Loan For Business?
A personal loan is a money you can borrow from traditional or online lenders. It can be used for any purpose, such as funding a business. You usually get a personal loan in a lump sum and pay it back along with interest through a fixed monthly installment. In most cases, you also don’t need collateral as a security when you apply for this type of financing.
But note that when getting a personal loan for your business, it’s your personal credit score, income, and debts that lenders will look at. It means that your business financial data and history are not relevant. Thus, in order to qualify, you have to make sure that you have good credit and an acceptable debt-to-income ratio.
Personal loans are appealing to many business owners and could be the solution to your company’s funding needs. But like other financing options, a personal loan also comes with some advantages and downsides.
Advantages of Personal Loans For Business
Before you decide to take out a personal loan, it wouldn’t hurt to see how it can be advantageous for your business.
- Easier To Obtain. With most online lenders like CreditNinja, the qualification and process of getting a personal loan are simpler and faster, provided that you have a good personal credit history and income.
- Uses Are Flexible. Lenders don’t care what you do with a personal loan as long as you pay it back. So, you can use it however you please.
- Competitive Interest Rates. If you have a good credit score, you can have relatively lower interest rates with a personal loan, which can save you money in the long run.
Downsides of Personal Loans For Business
Besides the benefits, it would be best to take into account the downsides of using a personal loan to fund your business so you can make a more informed decision.
- Mixes Business and Personal Finances. If your business can’t keep up with the payment, you have a higher level of personal risk.
- Limited Loan Amount. A personal loan is usually smaller, so you may not get the fund you need for your business.
- No Tax Credits. Unlike with business loans, you may not get tax credits for your interest payments with a personal loan.
Points To Consider Before Using A Personal Loan For Your Business
Ideally, a business loan should be utilized to finance the needs of your company. That’s why using a personal loan to fund your business should not be taken lightly. It’s a major financial decision that you have to think about seriously.
To help you do that, here are essential points you have to consider.
- Are You Just Starting A Business?
Getting a business loan with limited financial history is hardly possible. Thus, if you’re just starting a new business, opting for a personal loan to fund your business makes more sense since the lenders don’t consider your business’s financial background at all.
- How Much You Need To Borrow?
If the amount you need to borrow is relatively small, using a personal loan for your business can be a good idea. A personal loan typically ranges from $1000 to $50,000. So, if you need more than that, you might not get all the capital you need with a personal loan.
- How Much It Will Cost You?
Besides the interest, lenders charge application fees, origination fees, prepayment penalties, and late fees. That’s why you must know how much a personal loan will cost you. If you’re able to get one with the lowest rate possible, using a personal loan might be suitable. Be sure to look at the annual percentage rate instead of the interest rate.
- How Will You Pay It Back?
Personal loans have fixed interest rates and short loan terms, which are usually 12 to 60 months. Thus, you have to consider how you’ll pay back the loan. If you’re certain that you can repay the personal loan within the stipulated time, it can be a good option.
But if you don’t have a clear path to repayment, a personal loan might bring more harm than good.
Making The Choice
The decision to use a personal loan for business depends on several factors. Just make sure that you review each of them carefully. Consider the possible outcomes not only on your business but your personal finances as well. Remember that you don’t necessarily have to compromise one for the other. As much as possible, look for an option that will benefit both.