Personal loans for businesses – business.com

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Insufficient funding can be a major obstacle to achieving the dream of becoming a business owner, which is why many business owners take on debt to get started and operate. A popular option among small business borrowers is to take out a personal business loan. Issued by banks, credit unions, and online alternative lenders, personal business loans are unsecured loans that you pay back monthly over a fixed period. However, before taking out a personal loan for your business, make sure you understand the pros and cons of this type of financing, as it is not for everyone.

“If you have a clear plan for growth and understand the risks involved, it can make sense,” Nishank Khanna, CFO of Clarify Capital, told business.com. “That being said, there is a much higher risk with a personal business loan than with a business loan.”

Can you use a personal loan for a business?

Yes, you can take out a personal loan to finance your business. Often, small business owners go for this option if they cannot get a small business loan. Small businesses are the heart of the US economy, but the success rate among them is low. According to the Small Business Administration, only half of companies with employees are past the five-year mark, and the coronavirus pandemic has only exacerbated this problem.

As a result, lenders have strict requirements when providing small business loans and go to great lengths to ensure that they are protected. With a small business loan, the lender looks at both the credit rating of the business and that of the owner of the small business. Personal loans, on the other hand, are often easier to obtain and have different requirements. They are also an attractive financing option for small business owners, as there are usually no restrictions on where the money is spent. [Need a small business loan? Check out the lenders we recommend for small businesses.]

How do personal loans for businesses work?

Options abound for small business owners looking to take out personal business loans. You can get a personal business loan from a bank, credit union, or online lender, or even a loan marketplace or crowdfunding website. Many of these lenders have online applications that only take a few minutes to complete.

Personal business loans typically have fixed interest rates and fixed loan terms averaging 12 to 60 months. Underwriting is less strict than for a small business loan; the lender examines your credit rating, income, and debt-to-income ratio. Approval is quick, with some online lenders offering pre-approval times of less than two minutes. If you are applying through a bank or traditional lender, expect the process to take longer.

What are the advantages and disadvantages of personal business loans?

Before applying for a personal business loan, consider the pros and cons:

Benefits of personal business loans

  • They are easier to obtain. When taking out personal loans, lenders look at your personal credit score, income, and debt-to-income ratio. They don’t care how your business is doing or what you intend to use the money for. As long as you are creditworthy and your debt-to-income ratio is respectable, you will be approved. This is not the case with business loans, where lenders consider the health of the business.
  • They do not require collateral. A personal loan is an unsecured loan, which means that you don’t have to offer any collateral. If the debt is not paid, there is no enduring asset that you will lose as a result. Business loans, on the other hand, require collateral, sometimes several times the value of the loan. This prevents many business owners from taking out business loans.
  • They may have lower interest rates than business loans. Depending on your personal credit score, a personal loan may be the cheapest option. The terms of a business loan are based on your personal credit score and the financial health of the business. If you’ve struggled in the past or are just starting out, you’ll pay more to borrow. With a personal loan, it’s your credit score that counts. If it is high, you will benefit from a lower interest rate, even if your business has not made a profit.
  • Their the uses are flexible. For personal business loans, lenders don’t care what borrowers do with the money as long as they pay it back. Some lenders have restrictions, but most do not ask where the proceeds will go. This gives you the freedom to use your personal loan as you see fit.

Disadvantages of personal business loans

  • You mix business and personal life. It’s a big no-no for business owners to mix business and personal expenses, and it’s also true for loans. By taking out a personal loan to use for your business, you are mixing two aspects of your life. If things go wrong in one area, it could affect the other.
  • The loan limits are smaller. Personal business loans typically range from $ 1,000 to $ 50,000, which may be too small for the needs of some borrowers. Business loans have much higher limits.
  • You need a personal guarantee. While you don’t need collateral with a personal business loan, you do need to guarantee it personally, putting you and your assets at risk. If you don’t pay off the loan, the lender can’t come after your business, but they can come after you personally. The lender may sue you, attempt to seize property, and use other tactics to collect the debt. Plus, late and missed payments will show up on your personal credit report, which could lower your credit score.
  • You do not accumulate trade credit history. To get a business loan or a business credit card, you need to establish a business credit history, but that won’t happen with a personal loan, which is tied to you, not your business.

What Should I Consider When Finding a Personal Business Loan?

Borrowing money is not free. Lenders are in the business of making money, so they charge you interest over the life of the loan. In addition to interest, they are added to other fees, including administration fees, origination fees, prepayment penalties and late fees. These fees vary and are negotiable, but they also make it difficult to compare prices for a personal business loan.

That’s why you should look at the loan’s annual percentage rate instead of the interest rate: it gives you the total cost of borrowing, including all fees, said Josh Jones, chief revenue officer at Kapitus. “The most important thing to understand is the true cost of borrowing.”

Can you pay it back?

Apart from the cost of the loan, you will need to determine whether you will have the capacity to repay it; you don’t want to burden a new business with debt that you can’t pay off. If there is no clear path to repayment, it is best to consider an alternative.

What’s your credit rating?

With so many lenders to choose from, purchasing a personal loan can quickly become overwhelming. Who has time to sift through all the lenders, let alone compare their rates, terms and loan amounts? To narrow your search, know your credit score before you begin the process. Lenders set credit score requirements for their loans. Some only work with borrowers who have high credit scores, while others focus on sub-prime borrowers or those with bad credit. If you know where your credit score is, you can narrow down the list of lenders, saving you time.

What do I need to apply for a personal business loan?

The lender may require you to submit some or all of the following documents with your application:

  • Driver’s license or official government-issued photo ID
  • Bank account number
  • W-2
  • Income tax returns
  • Employment verification from your employer


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