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Taking out a business loan is normal when you’re launching or expanding a business. However, depending on your company’s financial situation, getting approved for a traditional business loan can be tricky.
The great news is that you can fund your business with a personal loan, which is generally easier to qualify. But, before considering this type of financing, you need to know some essential things about personal loans. Discover what they are below and whether using a personal loan is a good idea for your business or not.
What Are Personal Loans?
Personal loans are a lump sum of money you can borrow from traditional or online lenders. You can use this loan type for almost any purpose, including funding a business. When approved for a personal loan, you must pay it back in monthly installments along with interest and applicable fees over a predetermined period.
Getting a personal loan is appealing to many business owners. This is because the application process is more straightforward. Also, you don’t need to put up collateral to get approved for a personal loan in most cases.
Your company’s financial history doesn’t matter when applying for a personal loan for business use. However, lenders will undoubtedly look at your personal credit score, income, and debts. This means you still need good credit and an acceptable debt-to-income ratio to qualify for a personal loan.
What To Consider Before Using a Personal Loan for Business?
Using a personal loan to fund your business is a significant financial decision. Remember that you’re putting your personal credit at stake to make your business succeed. Before getting a personal loan for business use, here are several factors you might want to consider:
Are You Launching a New Business?
Your business credit score and financial history are critical factors lenders consider to qualify for a business loan. In Canada, 64 per cent of businesses that are two years old and younger were turned down for debt financing due to a lack of credit history.
If you’re launching a new business, taking out a personal loan to fund your startup might be a good idea since lenders won’t consider your business’s creditworthiness. You can get approved for a personal loan with better rates and terms if you have an excellent personal credit score.
How Much Do You Need To Borrow?
Unlike business loans, personal loan lending limits tend to be lower. Although some personal loan lenders offer up to $100,000, most personal loans typically range from $100 to $50,000. If your business needs a larger loan, taking out a personal loan might not be ideal.
How Much Will the Loan Cost You?
Considering a personal loan for business use might be an excellent option if you can get approved for the lowest interest rate possible. However, in addition to interest, lenders charge application fees, origination fees, and late penalties. This is why knowing how much the personal loan will cost you, in the long run, is vital. It’s a good idea to consider the annual per centage rate besides the interest rate.
How Will You Repay the Loan?
Most personal loans have shorter repayment terms, depending on the loan amount and other factors. But typically, the loan term ranges between 6–60 months. Getting a personal loan might not be good if you think you need more time to pay it back.
Remember, you’re personally liable to repay the loan on time. This means you must pay back the borrowed amount even if your business didn’t become profitable or you decided to close it. Have a clear repayment plan before financing your business with a personal loan.
Is Personal Loan the Right Choice for Your Business?
Like other types of loans, using a personal loan for business has benefits and drawbacks. When making the right choice, consider your personal and business finances. See that you understand the terms and conditions before you sign any personal loan agreement.
And as much as possible, determine your expected revenue and figure out how you’ll pay back the loan before you apply. Also, ensure to work with a reliable lender like FlexMoney, which offers fast personal loans online with no hidden fees.
This content is a joint venture between our publication and our partner. We do not endorse any product or service in the article.
