Having access to capital is crucial when you’re starting or expanding a business. There are many financing options for businesses of any size and type. Unfortunately, traditional business financing may not always work out for all entrepreneurs. Personal loans are among the top financial solutions that help them acquire the funds for their business needs.
Although you can get a personal loan for a variety of business purposes, it can cause more harm than good if you don’t know how to use it properly. For one thing, there’s the risk of mixing your personal and business finances, which can cause a lot of stress.
To prevent future headaches, it’s a good idea to equip yourself when it becomes necessary to take out a personal loan for your business needs. Of course, the decision is ultimately up to you, but here are some instances where using a personal loan can be your best option.
When It’s Cheaper Than Business Loan
When looking for capital to fund your business, it’s always imperative to take the lowest-cost option available. The best business loans are known to have low interest rates. But the rates can also be high, especially if your business has a poor credit score. If that’s the case, you’re likely to get better rates and more favorable terms with a personal loan.
A personal loan is often cheaper than a business loan as long as you have an excellent personal financial history or you can prove yourself as a responsible borrower. Depending on the lender and your qualifications, the interest rates will typically start as low as 5.99%, with a fixed repayment schedule and long repayment periods.
When You Don’t Have Established Business History
Business-specific funding is much more difficult to obtain if your business is just starting or doesn’t have an established history of operations. In addition, traditional lenders like banks or credit unions often have strict requirements you need to comply with. They would want to ensure that your business generates more than enough revenue to repay the loan.
So, unless you have a solid financial history and business plan, there’s a slim chance you’ll get approved for a business loan. That being the case, a personal loan will be easier for you to access since your business credit history won’t matter during the application process.
When You Need Quick Cash
The application process for most business loans can be complex and lengthy. With a lot of paperwork to fill, it may take several weeks to get a decision from the lender. Add up to that the high possibility of rejection. Your business can miss a lot of growth opportunities with such a prolonged turnaround time.
On the other hand, applying for a personal loan is relatively simpler, faster, and comes with fewer documentation requirements. It can only take as little as one or a few business days to process. If you need quick cash to fund your business, you can depend on getting a personal loan from credible online lenders like CreditNinja.
When Only A Small Amount Is Needed
Most banks are hesitant to extend business loans in small amounts. But if they do, the interest rates are usually high because small loans cost them the same amount of work as the large ones, with less interest in return. With that, a personal loan may work better for you if you only need a small sum of capital to start or grow your business.
Typically, the maximum amount of personal loans you can get for your small businesses is only $50,000 or less. However, if that would suffice your business needs, a personal loan can be an excellent way to get financing, with more manageable interest rates and repayment plans.
When You Don’t Have Collateral
Insufficient or lack of collateral is one of the top reasons banks reject entrepreneurs for business loans. The good news is, personal loans are unsecured, meaning there’s no need to pledge any collateral to get approved. If you lack collateral or don’t want to put any of your assets at risk on loan, it might be worth considering taking out a personal loan.
But even though a personal loan isn’t likely to require collateral, it can be a requirement for some alternative lenders who may offer a larger loan amount. Just make sure to shop around and research your options before committing to anything.
When You Need More Flexibility
Unlike business-specific financing, you can generally use the funds from a personal loan for just about anything, whether it’s for covering payroll, inventory, marketing, product development, or any other purpose. So, if you want to raise capital for your business but need that kind of flexibility in utilizing the funds, a personal loan is worth considering.
The best type of financing depends on your business’s needs, financial history, and qualifications. Using a personal loan to fund your business usually comes with both drawbacks and benefits. That’s why it is always important to weigh your options carefully before making a decision. Regardless, ensure you have a repayment plan in place so you don’t put your finances to further risks.