Running short of cash can be quite discouraging for entrepreneurs dreaming of setting up and expanding new ventures. Often, traditional business environments dictate that sourcing for a loan is always the better financing option. However, securing a business loan isn’t always that easy. Business loans come with high-interest rates and strict repayment terms, not to forget the tedious application process to obtain an offer.
As a result, most startup owners will go for personal loans as they are easier to obtain and less costly. But is it really worth taking a personal loan for business use?
Read on to explore the dynamics of securing a personal loan to fund your venture.
The Challenges of Getting a Business Loan
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The complexity of obtaining a business loan is pegged to wide-ranging factors that limit financial institutions from approving such loans. Such factors include;
- Low Income or High Debt – Lenders are interested in knowing if your business can service a loan should they approve it. One way of screening a venture’s loan serviceability is by determining its existing debt structure and income. Too much current debt and low business income is a turnoff to lenders.
- Lack of Credit Security – Most startups do not have business systems and infrastructure sufficient that can be used as collateral for a loan. Since collaterals are a basic prerequisite to securing a business loan, lenders consider financing such businesses to be extremely risky.
- Credit Worthiness – Financial institutions explore your personal and business credit ratings to determine your creditworthiness. Poor ratings and insufficient credit history make it harder for lenders to approve the loan.
When to Consider Taking Out a Personal Loan for Your Business?
Essentially, personal loans come in your name as opposed to your venture’s account name. As a result, you remain personally liable for the amount borrowed regardless of your startup’s financial performance.
As a result, you should avoid sourcing for a personal loan to finance your business unless the following conditions satisfy your borrowing.
- Proven Credit Repayment History – Should your business run short of cash flow, lenders will still require you to repay the acquired personal loan. Your ability to repay credit facilities in the past should suffice in such a scenario.
- Limited Financing Options – When you are out of business financing options, you can make a personal loan your go-to safe haven. It is possible to make a fortune out of a well-invested personal loan.
- Small Borrowing – A personal loan is always limited to specified figures as compared to a business loan. If you are looking for a small amount, then you might want to consider a personal loan.
Alternatives to Taking Out a Personal Loan for Your Business
Although the personal loan is convenient and easy to access, they may not always be the best and most affordable loan options.
Here is a look into alternatives to using a personal loan to finance your business.
- Online Loans – Online loans are offered by digital lenders at lower interest rates and borrowing costs. Today, there is a myriad of lenders offering online loans to new ventures at a click of a button.
- Crowdfunding – Crowdfunding is a financing option that allows you to source business funds from a pool of social networks.
- Business Credit Card – You can take care of your cash flow problems using a business credit card facility.
- Salary Advance – If you are employed, you can take all or part of your next paycheck to fund your business.
- Merchant Financing – This is a small loan provided to ventures integrated with merchant account services. The lender collects a percentage of sales generated from such merchant account services until the loan is repaid in full.
Things to Consider Before Taking Out a Personal Loan for Your Business
If you are considering using this type of loan to fund your venture, it is necessary that you assess the risks and benefits associated with this type of borrowing.
Here are some pros and cons:
- Personal loans are easy to access, with achievable qualification requirements.
- They are quick loans. This means that applications are processed and the loan approved in days, if not hours.
- There is no collateral required. Unsecured loans provide you with the amount you need without putting up any collateral.
- You can use the loan to finance both your personal and business needs.
- The personal loan is capped to specified figures. You can only get up to a few tens of thousands of dollars.
- The annual percentage rates (APRs) are often higher than business loans.
- These loans are issued in your name, putting your credit rating at risk in case of a business failure.
Ideally, when sourcing for business financing, entrepreneurs should always consider business loans first. However, with an exception of scenarios like having limited financing options, venture owners can prioritize borrowing against their name. Again, you might want to compare personal financing lenders to get the most affordable loan offer. Also, read through the loan terms and conditions to be sure of the reliability of such a fund.