Using a Personal Loan to Fund Your Business
Do you need funds for your business but got turned down for a business loan? Get a personal loan for business.
While a business loan is intended specifically for business endeavours, you can use a personal loan for any personal projects, including entrepreneurial pursuits.
Ideally, entrepreneurs get business financing to fund all business-related projects. However, not all of those who apply for this type of financing get the lender’s thumbs up. Those who are not approved often resort to a personal loan to alternatively fund their business ventures.
When Is It Wise to Get a Personal Loan for Business?
It’s a financially smart move to take out a personal loan to fund your business projects if:
1. You only need a small fund.
The main reason why it’s tougher to get approved for business financing than a personal loan is that it provides bigger funding to borrowers. You can get millions of dollars from a business loan, especially from banks. With a personal loan, on the other hand, you can only borrow a maximum amount of around $50,000.
- Business financing lenders also require a lot of qualifying factors for approval to ensure that you have the capacity to repay the loan.
- Banks and big lending companies typically turn down your application for a small business loan because it yields them less interest but requires the same amount of work.
2. You can't afford a high interest rate.
While banks and established lenders refuse business loan applications from SMEs, startups can still get financing from alternative lenders that offer small business financing.
- A small business loan grants an amount that is smaller than what you can get from traditional business loans. This fund is usually used to cover working capital needs.
- Because it mainly caters to small businesses and startups, it is less restrictive and requires less documentation.
- Just like with standard business financing, you can enjoy tax breaks from a small business loan. The interest that you accrue on the loan can be deducted from your business’ taxes.
Despite this advantage, however, a small business loan usually has a higher interest rate than a standard business loan. Because it is available to a wide range of borrowers, even to those who have a high risk of defaulting on the loan, borrowing comes with a price. If you cannot afford the high interest rate of a small business loan, get your funds from a personal loan at an APR that you can afford.
3. You are just starting up.
About 80% of all businesses fail within the first 18 months. Thus, if you are still in the early stages of your business, you might have a hard time convincing the traditional lenders that you are stable enough to repay your loan.
- Banks and lending companies typically require businesses to be in operation for at least two years to qualify for a business loan or at least one year for a small business loan.
- Also, your business must ideally have a comprehensive business plan, visible thriving facility and reliable cash flow with at least $100,000 in total revenue to qualify. With stability and positive net cash flow, the lenders are assured that your business is financially solvent to afford the repayments.
Lenders who provide personal financing, on the other hand, do not require you to own a business. However, they need an assurance that you have a stable source of income and financially capable of paying back your debt. To meet this requirement, simply present your financial documents like income tax returns and bank account statements.
4. You don't have or don't want to provide collateral.
Collateral is any valuable asset or piece of property that you offer to lenders as security for the loan. The lenders will seize these assets when you default on your debt. They then sold them to recover their money.
- Lenders that offer standard business loans typically require collateral with a monetary value that meets or exceeds the amount being loaned.
- If you cannot provide collateral, you can still get a small business loan but may need to sign a business lien. The lenders will have a legal claim against your business’s property or assets until your loan is repaid in full. The lenders can take your assets and sell them if you can’t repay their debt.
A personal loan, meanwhile, does not require any collateral. Thus, it is ideal if you do not want to risk your business’ property or personal assets to secure financing.
5. You have a good credit score.
One of the most important requirements of a personal loan is a good credit score. This is regardless of whether or not you will use the money for business or any other projects. Your stellar credit profile reflects high creditworthiness. It suggests a history of good debt management, which includes paying off your debt on time and without issues against your previous lenders.
Typically, you need to have a credit score of 580 or higher to get approved for a personal loan for business. The higher your score, the better your chances of qualifying.
Aside from a good credit score, your lenders also require your latest:
- Bank statements (approximately for the last three months)
- W-2 Form and pay stubs
- Tax return
- Personal identification
A Few Reminders
- A personal loan typically carries a higher interest rate than secured business loans, although lower than small business loans. The lack of collateral requirement makes it riskier for lenders to provide funds without a strong assurance that the loan would be repaid. They compensate for this risk by setting a higher loan interest.
- Your loan repayment will depend on your business profitability. If you encounter financial problems in your business operations, you may struggle to pay your debt obligations on time. The unstable status of your business, as well as your late repayment records, will negatively impact your credit score.
- It’s your good credit score that has greatly helped you acquired the personal loan. Maintain your high creditworthiness by making your repayments on time and completing your loan according to the agreed terms. When taking out a personal loan for business, always proceed with caution.
Positive Lending Solutions offers personal financing for small business owners. With access to over 30 banks and lenders in Australia, we can get the right personal loan for you. Call us on 1300 722 210 or fill out our 30-second Quick Quote form.