Can You Use a Personal Loan to Start a Business?

You’re fed up with your job. You haven’t moved up in your company’s ranks in a while and you realize that you have the ability to do better than you’re currently doing. Launching your own business is starting to seem like a good idea and a good way to escape the monotony and hopelessness of your job. So how do you start? You’ll need funds. You’re relatively stable financially, there’s some money in your bank account but it’s still not enough. There’s an option of borrowing money from your friends and relatives but it still doesn’t get you over the line. What about a loan?

It’s hard for small businesses to get a business loan, let alone for brand new ones. Banks are much keener to lend money to big companies – 34 percent of small businesses received money through their bank for their organization, while in the case of big businesses this number climbs up to 75 percent. It occurs to you that you could take a personal loan as well, but it seems that this option also has its obstacles.

Why not?

There are several reasons why you should think twice before engaging in this kind of a risk. The first one is the fact that mixing personal and business finances and obligations might have undesirable effects, especially if the firm grows and develops, which is what you naturally want. If you’re not able to give the money back, your personal credit score will be damaged. However, if you manage to pay it off, that obviously means your business is healthy and it would have affected your business’ credit score positively have you taken a business loan instead of a personal one. This way, it influences only your personal credit score. Finally, personal loans are normally smaller than business ones, so they might not cover all your initial expenses. So, is there a way to overcome or neutralize these difficulties?

Really, why not?

All these don’t have to pose such a big problem. For instance, when it comes to the fear of intermingling your personal and business finances, it’s safe enough to do that when you’ve only started your business, especially if you plan to run it on your own, at least at the beginning. It’s important that once you’re up on your feet you keep these two separate and know exactly which funds and assets (and, for that matter, obligations) belong to your company and what’s owned by yourself. But you have to get on your feet somehow first.

Initial boost

Sometimes, a personal loan can be not just the best but the only way to get that initial spark to move you forward. As it was mentioned, banks tend to give loans much more easily to already developed and fully-grown businesses. Usually, the bank will demand a detailed plan on how you intend to expand your company and spend the money they lend you. When it comes to personal loans, the banks lower the bar. Of course, you will have to have a good personal credit score, but you can get the money much more easily and quickly this way. For this reason, taking low rate personal loans to start a new business might make a lot of sense.

Collateral

There’s one additional problem when taking a business loan at this very early stage of your business – insufficient collateral. This is one of the most common reasons banks refuse to give out business loans. It’s hard to expect a newly opened business to fulfill this requirement. When it comes to personal loans, you might not even need a collateral, and if you do, there’s a possibility that you could use a real estate you own or some other of your belongings for this purpose. On the other hand, if you’re asked about collateral for a business loan, you might have literally nothing to offer.

Perfect for small amounts

Personal loans are very convenient if you already have some capital but you’re still short just a bit. Small business loans are not often approved, while in the case of personal ones banks tend to be more flexible and they will usually grant smaller amounts of money on good terms if your credit score is healthy.

In conclusion, taking a personal loan is definitely a reasonable way to finance your company if you’re starting your business endeavor from scratch.  Especially if you believe in your business and feel like the risk you have taken is going to pay off. Of course, you should take into consideration other ways of funding and do a careful research on which one of them suits your plans and needs best. Taking a personal loan has its drawbacks, but if you’re doing it at the very earliest stage of your business, just to get it up and running, it can be an idea well worth considering.

 

Alex Williams

My name is Alex Williams. I am a journalism graduate, and a rookie blogger trying to find my luck. Blogs are the perfect opportunity for presenting yourself to wider audience, getting the chance to showcase my expertise and receiving recognition. I am a regular contributor at Bizzmark Blog.

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