Are Personal Loans Good for Startups?

When starting a business, financing is one of the biggest roadblocks entrepreneurs come across. First, they start with their personal savings, seek funding from family and friends, try to look for angel lenders, but eventually resort to looking for a loan. Given the fact your business is starting out, the types of personal loans you are bound to get will come with tight requirements, restrictions, and limitations.

You might need to present the lender with your business plan, projected growth and even some form of collateral. At this point, a personal loan for startups becomes very attractive and it’s possible to benefit from one. However, you need to consider all the things involved and ask yourself some questions before you venture into it.

What Are the Benefits of Using a Personal Loan to Finance a Business?

A personal loan for startups can be useful in a variety of situations. Here’s some information on whether funding your startup is one of those situations.

It’s Easy to Qualify for a Personal Loan

Funding a startup with a business loan is a hard process. Overwhelming would be an understatement. Most lenders consider businesses that have been in operation for some time because it’s easier for them to gauge whether they’ll survive long enough to pay them back.

A startup has no documentation to show and hence meeting the requirements becomes impossible.

On the other hand, a personal loan for startups is quite easy to qualify for. The only thing most lenders will look for is your credit score and income. You can even get one with no income.

As long as you qualify, most lenders do not offer limitations on what you can do with the money.

You need to be aware, however, that your credit score and history will have a direct impact on the terms and interest rates of the personal loan.

Receiving the Funds Is Easier

Even after you qualify for a business loan, you don’t get the funds in your account immediately. The process can be excruciatingly long and you may have to wait up to months before you receive it. This can be inconvenient if your startup requires immediate attention.

With a personal loan, however, the process is much easier because once the loan is approved, you get the funds immediately. You can start with the business expenses as soon as you like.

Personal Loans Require Zero Collateral

One of the major drawbacks of business loans is the fact that you are required to submit some form of collateral as security for the loan. In the instance that you fail to pay the funds, they compensate themselves with the collateral. Missing payment means you’ll lose an asset, which can be risky if you are starting your business.

One of the major benefits of getting a personal loan is the fact that you don’t need collateral for it. Falling back on payments will not translate to losing an asset. Of course, it will affect your credit score.

What Are the Disadvantages of Personal Loans

These are some of the disadvantages of funding your startup with a personal loan.

You Have to Contend With Higher Interest Rates

Lenders do offer low-interest rates when it comes to personal loans. The thing is however, you need to have a stellar credit history and credit score in order to qualify for those low rates. If you have a below-average credit score, you’ll only qualify for a personal loan that comes with very high interest rates.

This could be very expensive on your side because you don’t have money to spare. Consider getting a personal loan if you have an incredible credit score. That, or brace yourself for high rates.

Limited Financing

When it comes to business loans, an amazing benefit if the fact that even though there are limits, you still get a huge sum of money to start off. You can use that amount to fund and run your business for an extended period without needing additional finances.

On the other hand, it’s hard to get that kind of financing from a personal loan. Actually, you might be able to get enough to cover some of the basic expenses. To keep the business in operation for a long time, you’ll still need to look for alternative financing options.

Your Credit Score May Get Affected

When you take a personal loan, one thing you need to be aware of is that you’ll be putting your own credit score at risk. If your business idea does not succeed and you fall short on payments, you’ll rake up a debt. All failed payments or even late payments will reflect on your credit history and possibly dent your credit score.

Funding a startup may be hard, but clearing a debt could be an overwhelming task if your business fails. The problem will be missed and failed payments reflecting on your credit history is that it’ll be extremely hard for you to qualify for other financial products.

It may be hard to qualify for a car loan, a home loan, or credit card, especially when you consider debt to income ratio.

Missed Opportunity to Build Business Credit Score

Business credit is different from personal credit and you only build it with a business loan. You need to have credit cards, loans, and any credit account in your business name and use your business identification. A business score with a positive credit history can be a blessing because you’ll easily qualify for other loans.

You’ll also have an advantage of securing lower rates and possibly lower insurance premiums for your business.

What Should You Consider When Taking a Personal Loan?

Here are some factors to take into considerations before taking a personal loan.

  • How much money can you borrow?
  • What are the repayments terms?
  • Are there any collateral requirements?
  • What is the minimum credit score required?
  • What is the minimum income required?
  • What is funding speed?

These Are the Benefits of a Personal Loan for Startups

When it comes to startup loans, most people think about business loans, and with good reason. Business loan products, criteria, and even payment structures are usually tailored towards businesses. As an alternative, entrepreneurs turn to credit unions, banks, and similar financial institutions for personal loans.

Getting a personal loan for startups can be an easy way to begin your business venture and if you weigh your options and find that a personal loan will be beneficial, then it could be an amazing idea.

If you’d like to know more, feel free to check out our website or get in touch with us.

 

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