Taking out a loan for a business is a standard part of the entrepreneurial journey. Approximately 29% of small businesses fail because they run out of capital, making third-party funding essential.
But what if you’re struggling to secure a conventional business loan?
Using personal loans to start or fund your business may have crossed your mind. Before opting for a personal loan, here’s what you need to know.
1. Personal Loans for Business Work the Same Way
Entrepreneurs who take out personal loans to fund their business operations often choose unsecured personal loans.
There are no differences between personal and business loans. You’ll have a fixed term period for personal loans online, and you’ll be required to make fixed monthly repayments until the loan plus interest has been fully paid off.
2. Is it Legal to Use Personal Loans for Business?
What you can use your personal loan for depends on the lender. With U.S. personal loan balances hitting a record high of $177.9 billion, more lenders are servicing this growing market than ever.
Some lenders will have clauses in their loan terms that prohibit the funds from being used for business purposes. However, many online lenders recognize the hassle caused by such restrictions. In response, many lenders have removed these restrictions entirely.
3. The Loan is in Your Name
Even if you have taken out your loan for business purposes, the name on the lending agreement will be yours. It creates a personal liability that pierces the corporate veil, leaving you on the hook if you cannot pay the money back.
Go through your finances before taking out a personal loan of any size for your business. Failure to repay could leave your creditors coming after you and your personal assets.
4. Personal Loans vs. Business Credit Cards
Taking out a personal loan could enable you to save money on your monthly repayments. Servicing debt is challenging, especially in this economic climate, so choosing the most affordable financial product can make all the difference.
In 2022, 51.3% of Americans said they had taken out a new form of credit. Avoiding high-interest rates could save you and your business thousands of dollars annually.
Depending on your credit score, your APR could be lower than if you’d paid for an expense on your business credit card. Shop around to ensure you’re getting the best deal.
5. Easier Qualification Requirements
During the underwriting process for a business loan, your lender will examine how long your company has been in business and its revenue. Your personal credit score will also be factored into your application.
First-time business owners trying to fund a new business idea may find it challenging to qualify without an exceedingly high credit score or collateral to put up.
Personal loans are easier to qualify for because they’re based on your credit score and current income. It’s one of the primary reasons why entrepreneurs opt for personal loans over business loans.
6. Personal Loans are Faster to Acquire
The time it takes to acquire funding might be a priority for you. Using a personal loan to cover upcoming invoices and payroll is time-sensitive. Ordinary business loans rarely match up with a tight deadline.
If you apply with an online lender, you can get approved and receive your personal loan within a week. Some of the fastest lenders may even approve your application within the same business day.
On the other hand, business loans require far more paperwork to apply for. Traditional lenders can take weeks or months to review and provide a decision on your application.
For example, a traditional SBA loan can take anywhere from 30 days to six months to process, which may be unsuitable for your timeline.
7. Personal Loans are Ideal for Smaller Purchases
Traditional business loans are larger than most personal loans. Taking out personal loans is ideal if you need to cover smaller expenses. Most lenders offer $1,000 to $50,000 in lending amounts.
These amounts may be suitable for a small startup to get them off the ground. In contrast, larger businesses may require significantly larger amounts.
Established companies must consider whether a personal loan can provide them with the required funding.
8. Personal Loans Offer Shorter Repayment Terms
Repayment terms are a significant indicator of whether a loan is right for you. A personal loan for a business will usually have repayment terms starting at one year and topping out at seven years.
Entrepreneurs requiring longer repayment terms should consider a traditional small business financing option. For example, an SBA loan has one of the longest repayment terms at 10 to 25 years.
Deciding how to fund your business can set it on the right or wrong course. Do your research and compare loan options to see what works for you.
If taking out a personal loan for your business, read through the terms and conditions to ensure no restrictions on business spending exist.
How are you going to fund your business?