There’s a big world of loan products out there, but the possibility is that when it comes to financing your business, you’ve only focused on one category – i.e. business loans. When you start your business, one piece of advice that you’ll receive and continue hearing often is that you should never mix up your personal and business finances. Easier said than done!
This relates especially in the start when it’s all too enticing to operate through a single bank account or only charge to one credit card. But there’s a motive why this advice comes up often – it’s very important for your business’s success, and also helps in keeping your personal finances safe. Business loans enable you to utilize your company’s financial reputation, including the credit and cash history in order to earn approval. However, these loans come with strict terms and conditions.
In contrast to the business loan is the personal loan that are given to the individual. Your bank or financial institution will evaluate your income and credit score, rather than that of your business. Personal loans offer more flexibility when it comes to applying for funds, and many do not even ask for collateral.
Knowing how critical it is to combine your personal and business finances, let’s have a look if it does make sense to finance your business with personal loan.
If you’re just starting out
For the budding entrepreneurs with very limited finances, getting a business loan is big challenge and is nearly impossible to secure one. In this case, the only option you’ll have is personal loan. In order to qualify for a personal loan, your lender will verify your credit score and annual income. If you do qualify, then there’s a possibility that the loan amount getting sanctioned is smaller than expected. This might not completely help you to get off the ground.
Insufficient Collateral
One of the reasons why businesses are denied loans is because of insufficient collateral, after considering cash flow. Traditional banks do consider collaterals, whereas online or SBA lenders won’t deny you a business loan. Many personal loans are unlikely to need collateral. If you feel that your savings are insufficient or if offering your home as collateral is not possible, you m ay then want to consider a personal loan.
Can you afford higher interest rates?
It’s because of the interest rates that you end up paying more than the loan amount granted. The higher the interest rate is, the more amount you end up paying in total. Personal loans to start a business tend to have a high interest rate in comparison to small business loans. This is because personal loans are unsecured and flexible in terms of repayment. Business loans for startups have low interest rate, however; they’re difficult to be sanctioned due to your financial history.
There are certainly times when opting for a personal loan for the business purpose could work better, especially if it’s the only capital available for you. No matter what, if you’re clueless about how the loan will be paid off, you need to avoid taking that risk.
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