Starting a small business is complex. They need patience, proper planning, time, and, mostly, a lot of money than you expected.
Accessing capital your small business requires is a challenging task. In 2022, just 35% of businesses got all the finances they applied for, according to a certain report from the Federal Reserve.
Fortunately, there are several financing options, which small business owners may turn to. One common financing option you shouldn’t overlook is a personal loan.
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What a Personal Loan Is
This is a line of credit, which you can use to make a large purchase. As their name suggests, personal loans are personal. That means you can use them to cover the costs of anything, which is vital for all your personal needs. $50K-$15MM-Get the Financial Boost Your Business Needs This might be funeral expenses, emergency expenses, moving costs, weddings, and home renovations, to mention a few.
But there are no hard-and-fast rules about what you must use a personal loan for. This means you may use it to pay credit card debts. That way, you will consolidate credit card debts into a personal loan.
Usually, the interest rate for personal loan is much lower than that of credit cards. The current APR for two-year personal loans is around 9.58%, whereas APR for credit cards is approximately 16.3%.
How Personal Loans for Small Businesses Work
When applying for personal loans, lenders often review personal financial details so as to determine the candidate’s eligibility. Expect also to present lenders with helpful details, which include the following:
- Personal assets
- Credit history
- Personal income
Normally, personal loans can range from $1,000 to $50,000. But some lenders can still provide more cash, depending on your financial history and credit score.
A personal loan may last between 1 and 5 years. However, remember that because these are personal loans, you will be liable for them irrespective of whether or not your business does well.
There are two main types of personal loans. These include secured and unsecured personal loans. Secured personal loans require you to provide assets to serve as security. If you fail to repay the loan, the lender will seize your asset and then sell it so as to cover the remaining loan balance. Examples of the examples you may give as collateral are a piece of land, homes, buildings, and motor vehicles.
On the other hand, unsecured personal loans are those loans, which don’t need you to give collateral. With unsecured personal loans, the amount of finances you may access heavily depends on your income. Since unsecured personal loans come with more risks of not repaying the loan, they attract higher interest rates.
Apart from secured and unsecured personal loans, you can also access other types of personal loans. Some of these may include the following:
- Check-Off Loans
- Short-Term Loans
- Asset loans
- Salary advance
- Logbook loans
In order to qualify for most of the personal loans available out there, you must have an outstanding credit score. Plus, you may need regular income so as to reassure your lenders that you will be able to afford to repay your loan.
While there are still bad credit options, these often attract a higher interest rate. Not to mention, they may come with a lot of restrictions. That means borrowers won’t be allowed to use those finances for the business.
When Personal Loans Are Bad for Your Business
If your small business model is at great risk or it was still struggling before the global pandemic, think twice when getting personal loans.
Even with more funds, your business may still have a structural problem, which results in failure. So as a business owner, you will have to closely look at the profits, overhead expenses, and payroll costs. If the sales have decreased, then consider tightening up your spending.
When Personal Loans Are Good for a Small Business
There are three major reasons why personal loans will be a desirable option to consider. Some of these reasons are:
- Lack of assets
- You require a small amount of money
- You are a startup
Why Consider Personal Loans for a Small Business
Personal loans to finance your small business might be a viable option when you can’t access alternative or traditional business funding.
The application process can be relatively easy, and the interest rate for personal loan is lower than that for a business loan.
In addition, the documentation needed is simpler than in personal loans, where banks require more details, like financial statements and bank account statements.
Normally, for personal loans, all you require is identification as well as two-year income tax statements so that your bank may assess your personal loans.
Finding and Applying for Personal Loans
Lenders market personal loans for paying for home improvements, vacations, and debt consolidation. However, they are likely to wait to market their personal loans to do business.
Personal loans often give a specific amount of cash and come with fixed repayment schedules. Plus, the personal loan carries a low-interest rate.
Unless you want to apply at a credit union or bank, you can apply for personal loans online. All you need to do is fill out an application online and then let the lender have a look at your credit school. Normally, it takes a few minutes to get a response.
How to Use Personal Loans for Business
Between LLC (Limited Liability Company) and inventory filing costs, expenses in a business startup may add up.
Around 2/3 of small business owners need over $10,000 to launch a business, according to 2022 LendingTree studies.
However, getting loans to start a small business takes work, as it might be hard to qualify for a small business loan. This is why as a small business owner, you will need a personal loan to cover the expenses.
As a businessman looking for funds to invest in gadgets or machinery for your small business, ensure you know the best ways to meet and finance those requirements.
Business loans can be the first option, which will come to your mind. But most financial advisors say that personal loans are an ideal funding option.