Big businesses start small, some in the garage. Still, the idea of getting financing, going to the bank to apply for the usual business loan can be difficult for someone who has no “business record” to speak of. An alternative to the standard and often strict business loans is a personal loan. It can be used for anything, including funding your first ever business venture.
Between Personal and Business Loans
Before we dig into the merits of a personal loan for your start-up funding, let’s get to know each type of loan first.
- Business loans. Made especially to serve the needs of businesses for capital, short-term funds, inventory, etc. They typically have a higher bar for qualifying, requiring stellar credit from the borrower and solid financials and business plan. Because these loans will not be paid out of your pockets when you default, lenders will need collateral to back these loans.
- Personal loans. Collateral and business credentials are something that you don’t have if your business is yet to be established. And the two above won’t be needed anyway if you go by the personal loan route. Made for individual needs, personal loans still require a good credit standing to be qualified but compared to bank loans, they can be more lenient.
Why a Personal Loan for Your Biz
Now you have an idea how each loan operates. The next section should clear the path to why a personal loan makes a good financing bet for your startup.
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- For those just starting. As noted above, lenders can require all sorts of things about your business to prove that it’s generating money to pay back the loan and there are sufficient company assets in case the loan goes bad. If your business is in its earliest stages, you can’t rely on your business’s reputation just yet.
- For those requiring less. There are startup loans and microloans of up to $50,000 that can come from the Small Business Administration. Their biggest challenge: they are not generally easy to get. If you plan to take out a smaller loan amount with a shorter processing time and lower rates than standard bank loans, a personal loan is in order.
- For those having no assets. Collateral is required to secure repayment of thousands of dollars in debt. But personal loans don’t require one perhaps because of their size. You have to be careful not to default because the lender could garnish your wage to repay your debt. More importantly, your credit score will be negatively affected.
Getting a loan for your business at a personal loan rate sounds a grand deal. Just to balance things out, here are some things to remember when you get a personal loan for your business.
- Credit. Personal loans still need a good credit standing. Tidy your credit history a bit before applying for one. This could also improve your chances of getting a lower rate and better terms.
- Closing costs. Personal loans also have closing costs that can eat at your loan principal. For a origination fee of $250, your personal loan of $2,000 could be reduced to $1,750.
- Combining personal and business matters. At the onset, mixing your personal and business financial matters is inevitable. Later on these two should not mix for purposes of tax and practicality.