Personal loans are typically unsecured, meaning they don’t require collateral — so you’re responsible for repaying the loan through monthly payments.
If the lender doesn’t have restrictions on using a personal loan for business purposes, you can use it to purchase equipment or office essentials, run a marketing campaign or for anything else your business needs.
Using A Personal Loan For Your Small Business
It may make sense to use a personal loan for your small business if your needs are simple. For example, if you have a new business without a long credit history or if you want a quick lending decision, a personal loan may be the way to go.
Many entrepreneurs who started new businesses or side hustles during the pandemic can take advantage of personal loans — rather than business loans — because business loans typically require a lengthy history of operations.
Personal loans provide a good source of funding for smaller loan amounts. The average personal loan balance in 2020 was $16,458, according to Experian. By contrast, the average loan amount approved by the Small Business Administration was $533,075 in fiscal year 2020, according to Federal Reserve data.
Why You Should Use A Personal Loan For Your Business
As long as your lender doesn’t impose restrictions against using personal loan funds for your business, a personal loan may make sense for your business because it has many benefits.
- Quick Funding — With strong credit, you may access your loan funds within one to two business days. By contrast, it could take a month or longer before you have access to your funds from a Small Business Administration loan.
- Qualifications Are Based On You, Not Your Business — If you have a good or excellent personal credit score, it’ll be easier to take out a personal loan. While business loan underwriters usually review your company’s revenue and business history, you qualify for a personal loan based on your individual credit history.
- No Collateral Needed — Most business loans are secured by collateral, which is a personal asset, such as a home. On the other hand, personal loans are generally unsecured, which means you won’t have to put up collateral to qualify for the loan. Your primary obligation is to make your payments on time.
- Flexibility — You can use a personal loan for business for any reason, such as marketing expenses, office supplies, inventory or any other purpose.
- Low Rates — Personal loan interest rates are typically lower than other funding sources. For example, credit cards have much higher interest rates. The average interest rate for personal loans was 9.58% in May 2021, while the average rate for credit cards with assessed interest was 16.30%, according to Federal Reserve data.
Risks Of Using A Personal Loan For Your Business
Personal loans are a quick and flexible way to pay for your business’s financial needs, including payroll, inventory and vendor expenses. But there are downsides to them.
- Small Loan Amounts — Since personal loans are typically for smaller amounts, a business loan might be a better option if you need a large sum of money.
- Can’t Build Credit For Your Business — If you want to get business loans in the future, a personal loan in your name won’t help you build up your business credit score. What’s more, a personal loan exposes your own credit to potential risks if you make late payments or default on the loan.
- Can Affect Your Personal Credit — If you already have a steady income and an excellent credit score, a personal loan will have lower annual percentage rates, or APRs. But for borrowers with bad or fair credit, a personal loan may have much higher APRs that make the loan more difficult to repay.
- Intermingling Finances Can Cause Headaches — When you use a personal loan for business, it’s easy to mix personal and business finances, which can cause problems when you file your taxes. Keep a separate business bank account for your business expenses and transactions to avoid complications.
- Could Limit Future Financing Opportunities — Taking out a large personal loan may prevent you from accessing funds for other purchases — such as a home or car loan — because lenders consider your debt-to-income (DTI) ratio to determine your eligibility for more credit. Adding a large personal loan for business finances could raise your DTI ratio significantly.
Alternative Funding Options For Small Businesses
If a personal loan doesn’t make sense for you, consider taking advantage of other small-business financing options. Here are a few alternative ways to get financing for your business.
Small-business loans can help you purchase new equipment, expand your reach and stock your shelves. Small-business loans are generally available through brick-and-mortar banks, credit unions and online lenders. Be sure to have your business plan ready. Note that many lenders require a business to have a history of at least a year or two, and you must be able to show revenue.
Many government organizations offer grants to help you start or grow your business. The primary benefit of grants is that you don’t have to repay them, like you do with loans. You may need to spend a fair amount of time researching various grants you’re eligible for, but the free injection of funds into your business is worth the extra effort. Begin your research on the Small Business Administration website, which provides many tools to find federal grants.
Outside investors, such as venture capital firms and angel investors, can help you launch and grow your business. Many entrepreneurs benefit from the mentorship they receive from investors with expertise, connections and experience reaching the highest levels of success.
Of course, investors are looking for financial rewards, and they’ll often only invest in companies with a clear advantage in the market. In exchange for their startup loan, they’ll typically expect part ownership in your company.
Business Credit Card
Business credit cards — especially those with a 0% introductory APR period — are a popular option to pay for business expenses. In this case, the cards can act as an interest-free loan during the promotional period.
You’ll generally need good credit to qualify for a business credit card, and these cards usually don’t carry high credit limits. Nevertheless, a business credit card may help you fund your new venture interest-free. Just make sure to pay off any balance in full before the promotional period ends, otherwise you’ll start accumulating interest on your business purchases at the card’s regular rate.
SBA loans or SBA microloans can help you start or grow your business with lower interest rates and low down payments. But the SBA doesn’t make small-business loans — it guarantees them through the U.S. Small Business Administration, an agency of the federal government.
The SBA guarantees a robust suite of small-business loans to assist business owners with varying needs. Just know that the application and approval processes can be pretty lengthy.
Many small businesses receive initial funding from crowdfunding websites. Successful crowdfunding campaigns can help you build customer contacts and collect buyer data.
Businesses that offer a unique product or service often have the most success. To gain traction and funding, you must dedicate yourself to marketing on multiple platforms. Note that crowdfunding involves many people, which can lead to unpredictable outcomes. Experts advise getting help from an experienced partner who can foresee potential problems.
Source: Fox Business