UNITED STATES—It’s normal for businesses to take out a loan now and then, whether they’re startups or established businesses. Business loans are among the options that help entrepreneurs get the capital they need to start or grow their businesses. The problem is, such loans are often difficult to acquire.
For that reason, businesses tend to use personal loans to meet various needs, such as meeting payroll, purchasing inventory, or buying ads. Personal loans are flexible, meaning you can use them for a variety of purposes. But before using them to fund your new or existing business, it’s essential to understand that they can impact your credit differently.
To help you make a more informed financial decision, we’ll be discussing circumstances that necessitate using a personal loan for your business.
Limited Business History
Lenders consider credit history to determine a borrower’s credibility. Usually, it’s hard to qualify for a small business loan with a credit score lower than 700. But it’s even more difficult if you’re only starting a business that doesn’t yet have a history of operations. Although there are loans for a start-up business, you need to provide a good business plan to attract lenders.
If you don’t have a solid business plan and track record, using a personal loan to get your business off the ground can be an excellent option. The lender will only assess your eligibility based on your personal credit history. According to CreditNinja, you can easily qualify for a personal loan for your business if you have a good personal credit score.
Need A Small Amount
One reason why business loans are more challenging to obtain is that they offer a large loan amount. People opt for them to get large sums like up to $500,000. Banks are often unwilling to approve business loans in small amounts because they generate less interest.
Personal loans are typically limited to $50,000. If your business doesn’t need more than that, taking out a personal loan might be a good alternative. But note that such loans are considered short-term, meaning you’ll most likely have to repay them within a year.
Lower Interest Rates
Although small business loans are available at low-interest rates, that doesn’t apply to all business loans. Some lenders may charge interest rates as high as 100% for business loans. A personal loan can be a cheaper option if you need a small amount but can’t afford to pay for high interest rates.
If you have a strong personal financial history, you can get more favorable terms with a personal loan than with a conventional short-term business loan. You’ll find personal loans with interest rates that start as low as 5.99%.
Don’t Have Collateral
When acquiring a business loan, lenders usually require borrowers to put up some form of collateral. It means that you have to pledge any asset to secure the loan, and lenders have the right to repossess it. In fact, many borrowers are rejected for business loans due to insufficient collateral.
If you don’t have collateral or don’t want to put your asset at risk, using a personal loan for your business is worth considering. Most personal loans are unsecured, which means they usually don’t require collateral for you to qualify. Getting approval largely depends on the lender and your creditworthiness.
Access To Fast Cash
Besides the eligibility requirements, the application process for business loans is much longer compared to personal loans. Depending on the lender, it can take up to several weeks or months to get approval and receive the funds. If you need access to fast cash, getting a personal loan might be a better idea.
With personal loans, you don’t have to provide a lot of documentation, like a business plan, the company’s balance sheet, and other financial data. According to CreditNinja, the requirements for personal loans are generally minimal and it doesn’t take a lot of time to get approval. As long as you are qualified, the whole process can only take a few hours or a couple of days.
The majority of business loans have limitations, meaning you can only use them for specific expenses. Most business loans only allow for purchases that will generate additional revenue, although some may allow you to refinance or pay off existing debt.
If you prefer more flexibility, a personal loan might be a better option. In most cases, lenders of personal loans don’t mind how you’re going to use the money. You can use the fund for anything. But ensure to read the fine print because some lenders may have restrictions on such loans.
Personal loans are easy to qualify for and they hold a lot of benefits. Although they usually come in handy, it’s always crucial to consider your circumstances before making it your option. Remember that whatever type of loans you choose, there are some levels of risk. Also, it’s important to make plans on repaying the loan.