There are several types of loans available and they are targeted for consumers’ unique financial needs. One example of that is a personal loan, which is used for a variety of reasons. When you need extra funds to cover for unexpected expenses or debt, you can turn to personal loan for that. But what about applying for personal loans for business? Did you know that you can use this type of loan for setting up your business?
Personal Loans vs. Business Loans
Choosing the right method of financing your business is one of the most difficult decisions that business owners have to face. Is it more ideal to file for a business loan or personal loan? Is there a difference between the two?
These are common questions that you might find yourself asking if you are in this particular situation. Business loan is a type of loan that enables you to build your business’ credit profile. This is ideal for larger businesses since the credit history and cash flow can be used for financial transactions and approvals in the future. Since the money is primarily for business use, it is often imposed with strict terms. In some cases, the loan provider (such as bank or financial institution) will require collateral.
On the flip side, any individual can apply for a personal loan. Your loan application will be evaluated based on credit-worthiness and personal income. There will be more flexibility in personal loans in terms of how the funds are used. Most personal loans also do not require any collateral upon application (although it varies according to the amount of loan applied for).
There are distinctive differences between these two types of loan. As a small business owner, you might be confused as to which of these two types of loans to consider. In the next section, you will be able to determine if a personal loan is suitable for starting a small business.
When to Apply for Personal Loans for Business?
Securing a business loan from banks if you are a starting business owner can prove to be a challenge. A research study from Pepperdine University reveals that only 34% of small businesses get the funding for their business through banks. Indeed, small business owners have lower approval rates for a business loan as compared to larger businesses.
You need to consider the following scenarios if you want to apply for personal loans for business:
- If you do not want to go through the stringent process of applying for a small business loan, opt for a personal loan instead. The stringent requirement of small business loans can be disadvantageous for business owners who are just starting out. The same goes with the entire application procedure – it can eat up significant number of hours just to process the application.
- If you haven’t established your business credit yet, a personal loan is the best option to take. Your business’ credit history is one of the biggest factors that banks look into when evaluating your business loan application. For this reason, you are asked to provide a great deal of documentation such as business plan, financial data and cash flow, references, and more. This is something that you will not be able to provide as a new business. It is a good option to choose personal loan while you are still in the process of getting your business off the ground.
- If you want to simplify the process of acquiring funds to start your business, choose personal loans. Did you know that there are 7 types of business loans? From line-of-credit loans, to installment loans, and interim loans (among others), it can be confusing as a starting business owner to choose exactly the right type of loan for your business. With personal loans, it is a more straightforward approach in getting the funding you need to start a business.
- If you only need a small amount, you can choose to apply for a personal loan. Most banks have a minimum amount requirement for business loans. This is part of the reason why larger businesses are the ideal candidates for business loans. If you want to generate funds to start your business that is lower than the traditional-term loan, personal loan is the ideal choice. You will also incur lower interest rates and have a better chance of approval.
- If you have no collateral, personal loan is the best option. Insufficient collateral is one of the reasons why small business owners are denied approval for business loans. As long as you have proof of capacity to pay the loan, you will be able to borrow the money you need.
If you are not a good candidate for a business loan based on the above scenarios, a personal loan can be the next best option. Nonetheless, business loans have several advantages for those who qualify for this type of loan. If you have stellar financial record and are confident that you can repay the loan quickly, a business loan can provide you with the funding you need. With this type of funding, you can position your business towards the ultimate goal: seeing it flourish and grow.
Are you in the process of starting your own business? You might want to consider applying for personal loans for business, so you can get your startup off the ground. Here are the final questions to ask to help you make your final decision:
- How soon do you need the money? Is it immediate or can you afford to wait?
- How much money do you need?
- How do you intend to use the funds you get?
- What is the most affordable in the long run?
- Will you be able to repay the loan and still sustain your business?
You can consider the potential scenarios listed above to determine if applying for personal loans would make more sense. This will enable you to assess your current business situation and how your financial needs would fit into that. Ultimately, your goal is to choose the right funding, so you can position your business to become a success.
Christine has a solid background in personal finance as she spent the last eight years working at one of the biggest banks in the US. She managed her own team of financial advisors that helped hundreds of people with their financing needs. Her innate understanding of different financial products and loans helped her move up the ranks quickly after graduating with a degree in Business Administration.