Of all the challenges that small business owners face, a lack of cash flow is one of the most common. In fact, 29 percent of all small businesses shut down because they have insufficient cash flow.
Are you having a hard time raising the funds to keep your small business afloat? Do you need help collecting money to get your startup off the ground?
No matter which part of the process you’re currently stuck in, a personal business loan might be just the tool you need.
Never considered taking out a personal loan to help fund your business? Not sure if it’s the right approach for you?
Read on to learn more about the pros and cons of personal business loans.
Business Loans vs Personal Loans
Before we get into the pros and cons of personal business loans, you may want to read more about the differences between a personal loan and a business loan.
The most obvious difference is that business loans are meant to be used strictly for business purposes. Personal loans are more flexible and can be used for just about anything, including keeping a business afloat.
There are also differences in the approval process.
To have your business loan application approved, you’ll need to provide information about the financial state of your business. The lender will also want to see your business plan and assess your business credit score. You may have put up collateral in exchange for the loan, too.
With personal loans, the lender will look at your personal finances instead. Their approval will be based on factors like your personal credit score, as well as your loan and credit card repayment history. Collateral usually isn’t necessary for personal loans.
Personal Business Loan Pros
There are many benefits that come with using a personal loan to keep your business afloat or get it started. Some of the main reasons why people take this approach include:
Faster and Easier Application
Generally speaking, it’s easier to get a personal loan than it is to get a business loan. You don’t have to provide as much documentation, and the lender usually makes their decision quite a bit faster.
If you need money right away and don’t have time to gather tons of documents to prove that your business deserves a loan, a personal loan is a much more efficient approach to take.
Greater Chance of Approval
In many cases, you’re also more likely to get approved for a personal loan than you are for a business loan. This is especially true if your business hasn’t opened its doors yet or has only been operating for a short time.
If you have a high personal credit score and lots of personal assets, you’ll also have an easier time getting approved for a personal loan.
Receive a Lump Sum
When you receive a personal loan, you receive a lump sum of cash up front. This isn’t always the case with business loans.
Sometimes, you have to submit draw requests and can only receive money periodically to ensure it’s being used wisely and for business purposes. No such conditions exist for personal loans.
Personal Business Loan Cons
Personal business loans can be a great option for some business owners. Not everyone ought to use them, though. Some of the drawbacks to using a personal loan for business needs include:
Personal Finances are at Risk
Taking out a personal loan affects your personal finances, even though you’re using it to fund your business. If you’re unable to repay the loan, your personal credit score will drop and you could face other penalties as a result.
Limited Borrowing Potential with Higher Interest Rates
Business loans are typically available for much larger amounts than personal loans. If you don’t need to borrow very much, a personal loan is a good option. If you’re looking for a substantial loan, though, you’re better off going the business route.
No Help to Your Business Credit Score
If you couldn’t qualify for a business loan because your business credit score was too low, a personal loan won’t help to increase your chances of approval in the future. If your goal is to raise your business credit score, a personal loan is not a good option.
Applying for a Personal Business Loan
After reading through the pros and cons of personal business loans, have you decided that it’s a good option for you? If so, these application tips will help you to increase your chances of approval:
Compare Lenders and Loan Options
Before you apply for a loan, shop around and compare lenders and the types of personal loans they offer. Compare available loan amounts, minimum credit score requirements, and interest rates. Read their rules and regulations, too, to make sure they don’t have any limits on the way you spend your personal loan.
Check Your Credit Score First
Be sure to check your credit report before applying for a personal business loan, too. Correct any errors that may be bringing your score down and try to pay down your debts to give your score a boost.
Only Ask for What You Need
You’re more likely to have your loan application approved if you only ask for what you need. Think carefully about the specific amount you need to get your business going or keep it afloat.
Create a Plan for the Money
It helps to create a plan for the money, too. This isn’t necessary for the application process, but it’s helpful for you as a business owner.
You can figure out which expenses are essential and decide exactly how you’re going to spend the money to yield the greatest returns for your business.
This will help you calculate how much you need and figure out how you’re going to pay the loan back.
Learn More About Business Financing
When it comes to funding your startup, a personal business loan can be a viable option.
If you’ve been confused about whether or not you should take this approach, be sure to keep this information in mind so you can make the best decision for your business.
Are you not quite ready to take out a personal business loan? Do you want to learn more about other business financing options?
If so, we have many other helpful articles available on our website. This one on business loans for people with bad credit is a great one to read first.
