How Feasible is it to use Personal Loans for Funding a Start-up?

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You will come across many such companies that resort to personal loans to fund their start-up. In this article, let us find out more about using personal loans for meeting expenses for your business.

The article will deal with the following aspects, namely,

  1. Difference between personal loans and business loans
  2. When should you opt for a personal loan?
  3. Types of loans and what is the best for?

Let us take one point at a time in the paragraphs that follow.

  1. Difference between personal loans and business loans

For financing your small business, you have several options to explore and choose from like debt versus equity, secured and unsecured loans, alternative loans, bank loans, term loans versus lines of credit, and so on.

Although many business entities avail personal loans for their business operations, it is not always a wise move. Are business loans better in that case? Let us find out.

You will think that both the loans are the same since the structure of both the financial instrument is almost the same.

While business loans are used for financing activities that are solely related to the business, and business entities mostly avail them. On the other hand, personal loans are extended to individuals. As the name suggests, personal loans are used for meeting personal financial obligations.

These loans can be further distinguished if you are aware of the loans individually. So, let us take a look at the features of both of these loans separately.

Business loans

The essential features of this type of loans are as follows-

  • To get approval for business loans, you enjoy the reputation of the company, its track record, credibility, financial stability. As such, if you have a good track record, your chances of getting a loan at better rates are high. Also, the loan amount is higher as compared to personal loans.
  • You require extensive paperwork for business loans. Since the amount involved is higher, creditors assess the risk factor before you get the approval of the same. Also, the better the credit score, the better are your chances to enjoy better rates and terms on the loans.
  • The following aspects are taken into account if you are opting for a business loan, namely,
    • The number of years the company is in business, or if it is a start-up, greater security is required.
    • Profitability
    • Niche area or industry
    • Credit history
    • Cash flow

Personal loans

As mentioned above, personal loans are extended to individuals. The personal income, credit history, personal credit score, income, expenses, and the purpose for which you are applying for the loan is ascertained.

Personal loans are flexible, and many creditors do not require any security against the loan that you are taking out. Also, the rates of interest for these loans are lower than business loans.

Personal loans are meant for-

  • Funding personal projects. So, if you are seeking such a loan for your project, the amount you receive can suffice.
  • Personal loans can be availed from credit unions, banks, and online creditors.
  1. When should you opt for a personal loan to fund your start-up?

Financing your business with a personal loan does make sense in the majority of the cases provided the size of your project is not huge. If you intend to avail a business loan, being a start-up, your application may be turned down, since your company is new and there is not much of credibility or past track record that you can boast of. As such, you can always apply for a personal loan, which can offer financial as a startup help.

Few more instances, when being a start-up you can apply for personal loans right from the beginning include-

  • You are a start-up and about to open the doors of your business.
  • You require a small amount of money, but at the same time, you are not willing to shell out a fortune on interest rates. If your requirement is less than $25,000, a personal loan for your start-up is perhaps a better choice and option.
  • You have tried other avenues, but the APR or the Annual Percentage Rate is not something that you can afford.
  • If you are not interested in risking your collateral, instead of business loan, a personal loan is a better choice. Lenders usually take no collateral for personal loans.
  1. Types of loans and what is the best for?

Given below are a few types of loans that you can use for various purposes-

  • Home Equity Loan or Line of Credit best for those start-up business entities that can risk using the equity that is trapped in their home for funding the business needs.
  • Business credit cards that can be used by borrowers that religiously repay credit card bills and at the same time want quick and instant cash.
  • ROBS or Rollover for Business Startups is one of the better start-up loans for business owners that do not want to take on additional debt; however, they are ready to in retirement funds.

The number of lenders in the market is many, and none of them offers the same terms and conditions on the loans, regardless of the type you are opting for.

So that you get the best deal, it is important to do a bit of homework. Compare rates and deals and then settle for the one that you think will help you to grow your business from scratch and also not drain you off all your resources.

In a nutshell, although, personal loans are a better alternative to business loans if yours is a start-up, there is one important aspect that can make the deal an optimum situation for you.

It has been observed that many companies that just join the bandwagon initially and juggle finances tend to mix up both business and personal finances. If you can manage the scenario on the financial plain, availing personal loans are the best bet.

So, what are your thoughts on this story?
Tell us in the comments.

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Isabella Rossellinee
Isabella is a marketing and communication expert. She also serves as a content developer with many years of experience. She has previously covered an extensive range of topics in her posts, including debt settlement, business and start-ups.

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