Running a business requires a lot of funds. Sometimes, money out of your pocket may not be enough to cover all the expenses. One of the valid options that you have would be applying for a loan. While some people apply for a business loan, startups often go for personal loans. If you are taking out a loan for your business for the first time, you may be confused about what to choose between a personal and business loan.
Experts reveal that it is possible to use either of the loans to fund your business. Getting a personal loan for your startup may seem like the better option, but you need to understand its risks before you submit your details. Sometimes, it is not advisable to mix personal and business finances. Let your circumstances guide you into choosing the best loan for your business needs. Find out more!
How does a personal loan differ from a business related?
On the surface, you may not quickly tell apart a business loan from a personal loan. Both of the loans come in a lump sum amount where you repay with interest and fees. They can also come in the form of a line of credit, which is renewable. Different sources offer such loans, including banks, credit unions as well as online lenders.
Despite their similar structures, this loan is specially meant for business needs. You can use it for things such as restocking your inventory, opening a new business branch, or covering your payroll. For a lender to approve your business loan application, your business should have a remarkable financial reputation. The lender considers the cash flow history of your business and its performance before validating your request for a this loan.
If your company has no problem with meeting these requirements, you can get a substantial amount from applying for a business loan. Since they come in higher amounts compared to personal loans, they are riskier for the lender. That is why most lenders of these loans only approve established companies that have a high likelihood of success. They look at your business credit score as well as your personal score before giving you a business loan.
This means that if you don’t have outstanding records, getting a business loan would be hard. Such loan applications also involve a lot of paperwork. Lenders have to check all the documents when determining the level of risk your company poses. Apart from your business credit score, lenders also consider the annual revenue your company has been making as well as the cash flow.
Since the lender requirements are strict, some business owners, especially those running startups, opt for personal loans that are less demanding. Some business owners also dislike the strict terms of business loans since you have to specify how you intend to use the loan. You may also need to pledge collateral when applying for this loan. This mitigates the risk for the lender in the case that you fail to make payments as they can quickly repossess the asset.
If any of the terms do not appeal to you, then a personal loan would be a better option. Here, you don’t need to specify what the money is for. You can use some of it to fund your business and part of it for other personal expenses. Most people, therefore, find them more flexible compared to business loans.
Personal loan lenders, in this case, are more lenient since they check your personal credit score and income. Unlike in business loans where you have to pledge collateral, personal loans do not set such conditions. You can, however, be sued if you fail to repay a personal loan.
Should you use a personal or business loan?
Now that you understand the terms of each type of loan, it is easy to determine which is better for your specific situation. If, for instance, your business has a remarkable reputation and excellent scores, then a business loan would be the most ideal. You should only apply for this type of loan if you are sure that you will not struggle to make repayments. Most of the borrowers who get approved for these loans enjoy high amounts that come with reasonable interest rates.
Though financing your business using a business loan makes sense, it is not the best option for every entrepreneur. Sometimes, getting this loan from your bank may prove difficult if your business is new. Meeting the eligibility requirements of a business loan can also be difficult if your company has been struggling to generate revenue. If you are facing such challenges, contact an online lender such as Cashfloat and apply for a personal loan. You will not be subjected to harsh conditions, and the chances of getting approved for a personal loan are high.
A personal loan also makes sense when you need a small amount and cannot afford to pay high interest rates. Direct lenders often offer business owners amounts less than $ 20,000 in the form of personal loans. You can use this for minor business needs without struggling to make monthly payments. The interest rates that an online lender may charge you for such an amount can also make the loan affordable.
If you don’t want to pledge any of your assets as collateral, then applying for a personal loan to cater to your business needs makes more sense. Since pledging collateral can put you at risk of losing an asset, most business owners try to avoid putting themselves in such situations. Lenders of personal loans only focus on your credit score and don’t look at your business. This gives new entrepreneurs a form of relief.
Since mixing personal and business finances is not advisable, you need the guidance of a loan specialist if you choose a personal loan for your startup. They can even help you figure out if a personal loan is an ideal option when you need urgent cash for your business.
