If you plan on starting a business, some of the biggest roadblocks will always be financial in nature. Financial problems will result in loans – and you can’t evade it. Personal loans are a good option.
Personal loans can help you with many things. This includes boosting your credit score.
At the end of the day, using a personal loan can be helpful to your business. It has different pros and cons that you would need to weigh, though.
What is a personal loan? What’s better between business loan vs personal loan? Why should I use it instead of a dedicated business loan?
Here’s what you need to know:
What Is a Personal Loan?
Before we try to look at its pros and cons, we need to first understand what we’re talking about. But what is a personal loan?
A personal loan, as the name suggests, is a loan given to an individual for their personal use. This tends to be a small loan that can help pay for possible events. Many people use such loans to supplement costs like funerals, weddings or emergencies.
Even then, you can also use such loans for business. This can help supplement whatever financing you need. There are good and bad things even to the best personal loans.
Take a look.
1. Pro: Personal Loans Have Faster, Easier Approval
If you’re a starting business, using a personal loan for business is a great choice for the easy qualification. Business loans need to fill many checkboxes before the bank approves. Personal loans are less significant in this.
It’s easier to get a personal loan than a business loan. Lenders for such a loan will only rely on your credit history and your financial score to provide funding. Business loans need more proof that you are worth the money.
If you need a faster loan, having a personal loan cover your financing is an outstanding move.
2. Con: There’s a Clear Upper Limit
You’ll notice this as soon as you get the loan, so we’ll tell you now. One of the big problems of working out a personal business loan is the loan’s upper limit. Many lenders tend to be careful when parting ways with their money, hence why they have secured loans and collaterals.
You’ll notice that the upper limit of personal loans is the lower limit of a business loan. When it comes to a business loan against a personal loan, you won’t get much mileage out of a personal loan.
If you only need to plug a shortage in financing, personal loans are great for that. If you expect a nice sum, however, you might want to reconsider.
3. Pro: A Personal Loan for Business Doesn’t Need Collateral
There is also the benefit of more flexibility. Since the lender doesn’t need evidence how you will use your loan, that’s great. You can plug it in your business however you want.
These loans also don’t need collateral. Since the value of a personal loan is not too high, its design makes it easy to pay for. This can give you the peace of mind you need that your future is not at stake if things fan out.
4. Con: You Can Get Stuck With Repayments
Even if you’re not stuck with collateral, a personal loan for business should be under heavy consideration. You’re stuck with a personal loan, whether your business works or fails. You are stuck with the repayment, which means you can’t rely on limited liability if everything fails.
This is why if you want to use loans for business, you need to make sure it can help with the business’ profitability. The last thing you want is for loans to haunt you well after the business died out.
5. Pro: Lower Interest Rates For Good Credit
If you have a great credit score and history, you can enjoy lower interest rates with personal business loans. A business loan will cost you more in the long run if you had a bad credit score. This also means you’ll pay less for interests.
Businesses tend to have bad credit scores during their first few years. This is the stage where the business is only afloat. Many small businesses fail in their first year, with more businesses not turning a profit for 5 years.
During this sensitive time, you need loans to keep the business running. Using a personal loan is great for plugging “holes” in the business to keep it afloat until it makes money.
6. Con: Interest Rates Can Hamper Business Growth
Many personal loans are great for people with excellent credit scores. How about people who are a bit on the worse side? A bad personal credit rating will net you higher interest rates.
Sure, an 8 to 10 percent interest rate on your car or boat should not be much. If you have this for your business, it limits your ability to expand. It will kill off your profits.
7. Pro: Lesser Penalties, Faster Repayments
When it comes to loans for business, you will notice that there are different types of penalties. These are there for the interest of lender profit – and that’s normal. A personal loan will not have such a problem.
Business loans have heavy restrictions that prevent faster payments. This is for the lender to earn more out of the loan. Personal loans will not have such a problem.
You can pay personal loans whenever you like before the payment term. There are many prepayment options with lenders and incentives that make prepayment a comfortable option.
Weigh Your Needs When Using a Personal Loan for Business
When using a personal loan for business, take into account the good and the bad. Such loans are great for providing a quick influx of financial liquidity to the business. If you can ensure the loan will lead to profitability, it’s a great loan to use on a whim.
If you want to learn more about your personal finance, consider looking at our other guides.