Your business is starting up, and you’ve found that one of the largest roadblocks is finding funding. Now you’re wondering if getting a personal loan for business is the right thing to do.
There are just as many pros as cons to getting a personal loan. Read on to find out how these pros and cons apply to your particular situation!
First of all, why should you seek a personal loan instead of a business loan? There are a few reasons.
Simply put, business loans are specifically for business needs, while personal loans are for personal needs. Both loans offer various products, such as easy to qualify for lines of credit or large long-term loans.
Business loans can aid in separation between business and personal finances. Depending on the loan, this can limit your personal liability if you encounter any kind of financial difficulty.
Business loans can also help open doors once you build financial credibility for your business, allowing you to grow and expand.
However, business loans can be difficult to obtain if your business doesn’t have established credit, or if you have a low credit score. It’s also a tedious and lengthy application process, which means you could be passing up business opportunities you otherwise would have jumped on with a personal loan.
Personal Loan for Business Advantages
Before you take out a personal loan, it’s best to check with your lender on whether they have any restrictions on how the funds can be used. However, most personal loan lenders allow you to use the funds at your discretion.
Here are some of the main advantages:
- You typically pay back personal loans in monthly installments, and the majority are unsecured, meaning you don’t need to put up collateral. This is easier to budget than a daily or weekly repayment that many business loan lenders require.
- You can typically borrow up to $40,000 with an annual percentage rate (APR) of 5% to 36%. These are comparable to business loan rates, and at times can be lower if you have a good to excellent personal credit score.
- Personal loans are easier to qualify for as the lender is only looking at your own personal finances and credit history.
- Personal loan lenders are flexible on how you use the funds. If you’re a sole proprietor, you can split the money between business and personal expenses, making it a good option for freelancers.
Personal Loan Disadvantages
Personal loans are not without their disadvantages.
The main disadvantages include:
- If you can’t repay the loan, you’ll damage your personal credit. Any late or missed payments will be placed on your credit report.
- If you have a secured personal loan, your lender has the right to seize or foreclose on your assets, such as your house, car, and other personal assets.
- You can’t borrow as much with a personal loan compared to a business loan. Personal loans range up to $40,000 with a few lenders maxing at $100,000. Business loans can lend up to millions of dollars.
- Lastly, interest on personal loans isn’t tax-deductible, unlike business loans.
How to Get a Personal Loan
If you’ve decided that a personal loan is the best choice for your business, here are a few tips to get you started.
Check Your Credit Score
Remember that a good to excellent credit score gives you a better chance of qualifying for a personal loan and potentially a lower interest rate.
If you’re looking at a bad to fair credit score, it’s recommended you try building it up before applying, as this will put you in a better position overall.
Compare Estimated Rates
If you know your credit score, you’ll have a better idea of the interest rates and payment amounts you’ll qualify for as you apply for personal loans.
Pre-Qualifying for a Loan
Pre-qualifying for a personal loan allows online lenders to do a soft credit check that won’t affect your credit score. You’ll be asked for this information:
- Social Security number
- Monthly debt obligations
- Employer’s name, work address and phone number
- Address, email, phone number
- Any previous addresses
- Date of birth
- Mother’s maiden name
- College name and major
There are other reasons than a low credit score that may make you ineligible for pre-qualifying. These include:
- Too little income
- Insufficient work history
- A high debt-to-income ratio
- Too many recent credit inquiries, for instance for credit card applications
Make sure you’re getting multiple pre-qualified loan offers so you can compare the loan amounts, monthly payments, and interest rates.
Besides online lenders, it’s also recommended to seek personal loans from your local community bank as well.
While some large financial institutions like Citibank and Discover offer unsecured personal loans, you may get a better offer by a local bank you have an existing relationship with. Check all your options!
Financing Your Startup
By now you should realize the pros and cons to getting a personal loan for business and whether it’s the right decision for your situation. With all of these factors in mind, it’s important to know you have many avenues available to you, even if your personal credit isn’t the best!
Ready to take the leap and start applying for personal loans? Start with Signature Bank of Georgia to simplify the loan process.