UNITED STATES â It’s normal for businesses to take out a loan every now and then, whether they’re startups or established businesses. Business loans are one of the options that help entrepreneurs get the capital they need to start or grow their business. The problem is that these loans are often difficult to obtain.
For this reason, businesses tend to use personal loans to meet various needs, such as payroll, buying inventory, or buying ads. Personal loans are flexible which means that you can use them for a variety of purposes. But before you use them to finance your new or existing business, it’s essential to understand that they can have a different impact on your credit.
To help you make a more informed financial decision, we’ll discuss the circumstances that require the use of a personal loan for your business.
Limited business history
Lenders take credit history into account to determine a borrower’s credibility. Usually it is difficult to qualify for a small business loan with a credit score below 700. But it is even more difficult if you are only starting a business that does not yet have an operating history. While there are business start-up loans available, you need to provide a good business plan to attract lenders.
If you don’t have a business plan and a solid track record, using a personal loan to start your business can be a great option. The lender will only assess your eligibility based on your personal credit history. According to CreditNinja, you can easily qualify for a personal loan for your business if you have a good personal credit rating.
Need a small amount
One of the reasons that commercial loans are more difficult to obtain is that they offer a large loan amount. People opt for them to get large sums like up to $ 500,000. Banks are often reluctant to approve small business loans because they earn less interest.
Personal loans are generally limited to $ 50,000. If your business doesn’t need more than that, taking out a personal loan can be a good alternative. But note that these loans are considered short term, which means you will likely have to pay them back within a year.
Lower interest rates
Although small business loans are available at low interest rates, this does not apply to all business loans. Some lenders may charge interest rates of up to 100% for business loans. A personal loan can be a cheaper option if you need a small amount but can’t afford to pay high interest rates.
If you have a strong personal financial history, you can get better terms with a personal loan than with a conventional short-term business loan. You will find personal loans with interest rates that start as low as 5.99%.
Have no guarantee
When obtaining a business loan, lenders generally require borrowers to provide some form of collateral. This means that you have to pledge any assets to secure the loan and the lenders have the right to repossess them. In fact, many borrowers are turned down for business loans due to insufficient collateral.
If you don’t have any collateral or don’t want to put your assets at risk, using a personal loan for your business is worth considering. Most personal loans are unsecured, which means they usually don’t require collateral for you to qualify. The approval largely depends on the lender and your creditworthiness.
Access to Fast Cash
Besides the eligibility requirements, the application process for business loans is much longer compared to personal loans. Depending on the lender, it can take up to several weeks or months to get the approval and receive the funds. If you need to access quick cash, getting a personal loan might be a better idea.
With personal loans, you don’t have to provide a lot of documents, such as a business plan, company balance sheet, and other financial data. According to CreditNinja, the requirements for personal loans are generally minimal and the approval does not take a long time. As long as you are qualified, the whole process may only take a few hours or a few days.
The majority of business loans have limits, which means you can only use them for specific expenses. Most business loans only allow purchases that will generate additional income, although some may allow you to refinance or pay off existing debt.
If you prefer more flexibility, a personal loan might be a better option. In most cases, personal loan lenders don’t care how you are going to use the money. You can use the fund for anything. But be sure to read the fine print because some lenders may have restrictions on these loans.
Personal loans are easy to obtain and offer many benefits. While they are generally helpful, it is still crucial to consider your situation before making your choice. Remember that no matter what type of loan you choose, there are certain levels of risk. In addition, it is important to plan the repayment of the loan.