Personal Loans: Should I Use Them for My Business?

A lot of loan products are being offered by the financing companies depending on one’s needs.  There’s a corresponding package for every loan purpose: get a housing loan when purchasing a home, an auto loan to buy your dream car, or an educational loan to pay for your tuition fees. For a loan with a flexible purpose — there’s a personal loan.

If business expansions are in your pipeline and you’re looking for a working capital support, the first financing option that rings in your head is a business loan. This type of loan is tailored fit for businesses.

However, don’t limit your option to this for there might be other loan products applicable to you. Exploring other loan products might give you an advantage rather than focusing on business loan alone. Come to think of this, why not consider getting a personal loan to finance the capital you need?

How can personal loans be used to start a business?

First off, what is a personal loan? It is a type of loan, usually shorter in term and smaller in amount than any other loans, and with fixed monthly payments. The unique characteristic of a personal loans among others is that it is usually unsecured in nature, meaning collateral isn’t always necessary.

Moreover, the purpose of personal loan isn’t limited to a specific use. As the term itself, personal loans can be used for personal purposes including financing your business such as purchase of an equipment or inventory build-up.

Benefits of using a personal loan to start a business

Flexibility: One unique characteristic of a personal loan is its flexibility on the loan purpose. You don’t need to justify the purpose of the loan and the financing company will not oblige you to use the fund for a specific purpose. Once you’re approved, you have the freedom to use it anywhere and anyhow you need it. This is especially applicable for small businesses, where you can freely use a portion of your loan for personal or business purposes to cover any currently maturing obligation.

Lower APRs possible: This is in apples to apples comparison to credit cards which is another type of a flexible loan that is also usually smaller in amount. Personal loans usually have lower APRs as compared to credit cards which saves you a few more bucks.

And since repayment of a personal loan are in equal monthly amortization up to its maturity date, you are obliged to pay the loan monthly which saves you from getting a compounded interest when left unpaid.

Ease of qualification: Another good news about a personal loan is that it is easier to apply than any other loans. Unlike a business loan which requires that the business is already operating and you have all the necessary business papers, a personal loan does not require.

However, personal loans highly vouch on your credit score and source of income. You should have a steady source of income which may be in form of a salary or a stable business.

When to Finance Using a Personal Loan

Applying for a business loan when your venture is just about to sprout can be challenging for you to get approved. Based on a study, a fraction of 34% with small businesses gets approval for business loan as compared to a 75% loan approval for larger businesses. If you belong to the smaller sector, personal loans might be perfect for you.

If you haven’t yet opened your doors

As mentioned, if you’re in the middle of a start-up business, personal loans for your business is the answer to your financing needs. Securing a business loan will leave you struggling to secure a reliable business plan and cash flow.

If the amount you need is small

Personal loans are designed for small funding requirements. Some bigger banks tend to reject small loan applications as the cost of processing and manpower is equal to the ones with the higher loan requirement. If your desired amount is for only $25,000 or below, you’re likely be not entertained on a traditional loan.

If you’re worried about collateral

One of the common dilemma in applying for a loan is giving a collateral that may be acceptable to the financing company. Once you fail on this, you’re automatically rejected to the loan.

This is where a personal loan works best. It doesn’t necessarily require you to have a collateral. So if you have a thin chance of providing a collateral property, personal loans might be for you.

Deciding on whether to use a business loan or a personal loan to fund your business depends on the weight of the advantages and disadvantages.  If the need is typically smaller, then personal loans might be tailored fit to your need.

Whatever you choose, just remember to always check what’s beneficial for you.

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