A full 77 percent of small business owners said they use personal funds to keep their doors open. In some cases, that means drawing on savings and other accounts. For more people, it means leveraging their personal credit to get loans.
Getting the right financing is crucial for any business. It’s sometimes easier to get a personal loan than a business loan. That may explain why a personal loan for business is so popular.
Is it the best idea though? There are benefits to using personal credit for business needs, but there are also risks. This guide walks you through the pros and cons to help you better understand your options as a business owner.
A Personal Loan for Business is Easy to Get
One of the reasons business owners turn to personal loans is that they’re often easier to get. If you need funds today, you may be able to get a personal loan in short order.
Business loans can take weeks to approve, and that’s if you have your paperwork in order.
The eligibility criteria for a small business loan often sets a high bar for new businesses. If you haven’t yet opened your doors, you may not find a small business lender willing to loan you the money. They want to see a business plan and proven results so they can feel confident giving you a loan.
In these situations, a personal loan might be the right answer. They can be used to finance personal projects, which include your business.
The eligibility criteria also rests on your credit score and track record. You likely have a longer credit history, so a lender may feel more confident giving you a loan.
Consider that just 26 percent of business owners who apply for a loan are approved by a large bank. Alternative lenders approve more people, but even then, you aren’t guaranteed to get approved.
You Have More Options with Business Loans
When you apply for a personal loan, you’ll likely get one of two types: a line of credit or a fixed-term loan.
Business loans, on the other hand, come in a few more flavors. You can still get a term loan or a line of credit, but there are types of loans designed specifically for business.
A good example is equipment financing. You can use this type of loan to cover the full cost of new or used equipment. The term of the loan may be as long as the expected life of the equipment.
Since the equipment serves as collateral, the eligibility criteria may be somewhat relaxed. A loan like this helps small business owners get exactly what they need when they need it.
Consider that commercial equipment is often quite expensive. You may not be able to qualify for a personal loan large enough to cover something like a commercial oven or a tow truck.
You May Not Need Collateral for a Personal Loan
While there are certain types of business loans that don’t need collateral, many of them do. If you’re just running a small, service-based business out of your home, you may not have much in the way of collateral.
Even if you do have collateral, using it against a loan puts it at risk if you happen to fall behind on your payments. Your lender could seize property or inventory if you can’t make your loan payments. That could jeopardize your business’s ability to keep operating.
Using a personal loan for business can help you get around this sticking point. If you fall behind on your payments, your lender can’t seize your assets. Your credit might be damaged, but you’ll be able to keep the doors open more easily.
Personal Loans Risk Your Credit
If you fall behind on a personal loan, it’s your credit score at risk. That could end up hanging over your head for a long time, even if your business folds.
A poor credit score can affect your ability to access credit, such as for buying a new car or a mortgage for a new home. You may also have trouble securing funding for any other business you try to start.
When you take out a business loan, your personal credit is more insulated. The business has its own credit rating, which is what will be at stake.
Personal Loans Are Great for Small Amounts
Just how much money are you looking for? It’s an important question to ask when you consider your options for financing your business.
If you’re looking for a large amount, a business loan is often the right choice. For smaller loans, a personal loan may be the only option. If you need less than $25,000, most small business lenders won’t consider your application.
There are other lending alternatives but you’ll need to consider interest rates for these alternatives. They may offer you a small loan, but the interest rate will be quite high. In some cases, the personal loan will have a more attractive interest rate.
Personal Loans Have Low APRs for Some
Many people believe personal loans have lower APRs than business loans. This is sometimes true, but it’s not the case for every loan.
The interest rate you receive with a personal loan depends heavily on your credit score and salary. If your credit isn’t stellar, you may not qualify for the lowest rate.
In some cases, a business loan might be able to offer you the most attractive interest rate.
Which is Right for You?
Generally speaking, it’s better to use a business loan for your business needs. There are scenarios where it makes perfect sense to use a personal loan for business.
If you have questions about what option is right for your business, get in touch with us. We can help you discover more financing options that fit your unique business needs.