Personal Business Loans
Personal business loans refer to taking out a personal loan to start a business under your name. It’s one of the most common sources of capital, especially for smaller startups who can’t meet the stringent requirements of a business loan.
But a much more important question than “how to get a personal loan” is why. Why would you want to do that, and what are the risks involved?
In this article, we’ll discuss personal business loans, the pros and cons of doing it, and whether it’s a good idea for you.
Personal Loans vs. Business Loans
At first glance, personal and business loans seem to be the same as they have similar payment schemes. However, a critical distinguishing factor is how the applicant is evaluated to approve or reject the loan.
Business loans are made in the name of the business and are used to finance their operations. The amounts here are usually much more significant, hence banks or lending institutions are often more stringent. You’ll often need to provide financial statements to evaluate if your company is profitable or can be in the future.
Business loans should only be used to finance business operations, and banks will be very stringent with this requirement.
Personal loans, on the other hand, are made by individuals to finance personal purchases such as buying a home or a college education. The main thing banks look at is your credit score and your income potential. Personal loans are more flexible and don’t require collateral as business loans often do.
If you’re wondering how to get personal loans for business, most banks and lending institutions will help you out. You can also apply for personal business loans online.
Pros and Cons of Using A Personal Loan for Business
Taking a personal loan to start a business is one of the common ways people use this kind of loan. However, that doesn’t mean it’s the way to go for everyone. There are pros and cons that you need to know first.
First, we’ll look at the pros. The biggest one is that personal loans are easier to get than a business loan. You can usually qualify as long as you have a decent credit score to back you up. Repayment is also made every month, so planning ahead is easier.
The best thing is that personal loans are flexible. You can use it to finance anything you wish, not just your business.
However, the most significant limitation is that personal loans typically only allow for smaller borrowing amounts. If you’re financing a capital-intensive enterprise, it’s nearly impossible to do it with a personal loan.
The other thing is that you’re putting your name and reputation on the line. If you can’t repay, your credit score will be significantly affected. Plus, if you’re getting a secured loan, your personal assets won’t be safe, either.
When to Use a Personal Loan vs. Business Loan for your Business
The biggest reason to use a personal loan for business startup is when you don’t have any existing businesses yet. Since you won’t qualify for any business loan, personal loans are a good alternative. This also applies if your business is relatively new, or isn’t proven to be profitable yet.
Other than that, everything points to getting a business loan instead.
For one, if you need to finance something worth more than $100,000, business loans should be your priority. Even if you managed to get that amount through a personal loan, the risk to your personal credit score is much too high.
And speaking of credit score, it’s a good idea to consider a business loan if you’re planning to take out a mortgage or any other personal loan in the future. Getting a personal business loan will increase your debt-to-income ratio, making it near impossible to borrow further until you’ve repaid your existing debt.
Lastly, it makes business sense to separate the company from personal expenses.
Alternatives to using a Personal Loan for your Business
Fortunately, there are plenty of good alternatives beyond just using a personal loan or a business loan. Some third-party companies, like L3 Funding, offer the best of both worlds by giving small business loans with the flexibility of a personal loan.
One of L3 Funding’s go-to solutions is the unsecured loan for small business, which give you access to significant business funding (up to $10 million) without the need for any collateral or stringent requirements. And we can get your funding as fast as 24 hours, depending on the situation.
We also offer other funding solutions like a business line of credit and merchant cash advance. These are great for helping you cope with demand during peak seasons, or help you bridge the gap during lean months.
Whatever your funding requirements, L3 will most likely have the solution for you. Contact us today to schedule a free consultation to find out the best financing option for your business.