Should I Use a Personal Loan to Start My Business?
April 20, 2018
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When you have a great idea for a business, the biggest roadblock to your success is money. While there are lenders that offer small business loans, they typically require that you already be in business and have a significant amount of revenue.
You can always try to find an investor, but that option isn’t always available either. Depending on how much you need to get started, a personal loan may be a good option to consider.
But before you start applying, know that there are both perks and pitfalls to using a personal loan to fund your startup. Take a look at each group to make sure it’s right for you.
Pros of using a personal loan to start a business
There are a few good reasons why you should consider using a personal loan to start your business.
The debt is unsecured
Even if you qualify for a small business loan, they typically require some form of collateral. This means putting up your business assets and maybe even personal assets like your house or your car to get capital.
With a personal loan, you don’t have to worry about any of that. While some lenders offer secured personal loans, most are unsecured, and you can use the money for just about anything.
They’re easy to get
You don’t need to put together a copy of your business plan to get a personal loan like you would with a business loan or investor. Instead, your approval will be based on how much you want to borrow, your income and debt situation, and your credit score.
If all of those things are in good shape, you shouldn’t have any problems. And with most lenders, you should be able to get your money within a week.
You don’t need to borrow a lot
Top personal loan companies offer loans as low as $1,000, and some banks and credit unions may go even smaller. If that’s all you need to get off the ground, a personal loan is a good choice.
Cons of using a personal loan to start a business
While there are some good things about using a personal loan for your startup, the disadvantages could be deal breakers for some.
It’s tied to your personal credit score
If you borrow money and the business doesn’t pan out, you’re still on the hook to pay off that loan. If you don’t, it could damage your credit score.
Even if you do pay off the loan in time, it will still show up on your credit report. That debt, combined with other debt, increases your debt-to-income ratio (DTI). And if your DTI is too high, you may have a hard time getting approved for other loans you may need in the future.
You could pay a boatload of interest
Because personal loans are typically unsecured, they carry higher interest rates than secured loans. While some lenders offer personal loan interest rates in the single digits, it’s common to see rates above 30% if your credit isn’t in great shape.
If you need the cash and can’t find it any other way, that may still sound appealing. But it’s important to take a step back and consider whether your business idea would return enough to cover the cost of the loan.
It won’t help your business’ credit history
If you want to build your business for the long run, one of the best things you can do is to build a business credit history. By doing this, you can avoid putting your personal credit on the line every time you need to borrow money.
Establishing a solid business credit history will also improve your chances of getting lower interest rates on small business loans, saving your business money in the long run.
You may not get enough capital
While smaller loan amounts with personal loans may be a good thing if you don’t need a lot of cash, they can be a problem if you need a lot.
How to get the best personal loan interest rates
If getting a personal loan is right for you, you can save yourself and your business some money by shopping around. Compare rates from several personal loan companies to see what kind of offers you can get.
Also, take a look at other features. For example, some lenders charge an origination fee, which can be as high as 8% of the loan amount. And some lenders may offer more flexible repayment options than others.
In other words, think about your preferences and find the personal loan that matches them the best.
Should I use a personal loan to start my business?
Using a personal loan for your business might be a good idea if you’re just starting out, especially if you don’t yet have access to small business loans or investors.
That said, it’s important to consider the benefits and the drawbacks of using a personal loan, so you know what you’re getting yourself into. If you understand this and take the time to get the right loan for your needs, you’ll be in a better position to reach your goal of becoming a business owner.