Most people rush into getting business loans to fund their small businesses. However, business loans are offered by financial institutions to businesses with minimum turnover. Businesses should also have a business profile, collateral, and a clear purpose of the loan to get approval.
These requirements make it almost impossible for startups and small businesses to access business loans. An attractive alternative is using personal loans to fund your small business activities. Personal loans are unsecured loans that can be used for various activities, including business needs.
When to Use Personal Loan for Business Purposes
Most established businesses opt for business loans to fund their business needs. However, as mentioned, most startups with minimal or no trading history struggle to get approved. This makes personal loans a suitable financing option for entrepreneurs to grow their business ventures.
Unlike business loans, personal loans are given to individuals. Lenders only need to assess the individual’s eligibility based on credit score, personal financial situation, and income instead of business finances. However, because personal loans are taken in your name, you will be 100 percent liable for paying back regardless of your business performance. You should consider personal loans for your business in the following circumstances:
- When starting up: Accessing business funding if you haven’t opened your business is challenging. Personal loans can help you get your business off the ground.
- You only need a small amount: Most banks reluctantly approve business loans to small businesses because they don’t make much. It isn’t a lucrative option for banks. However, personal loans are easier to access and don’t depend on the type of business.
- You don’t have assets: Accessing business loans without collateral is difficult. Business loans are also subject to a lot of underwriting and scrutiny. On the other hand, you can use personal collateral to access personal loans.
- Getting approved for personal loans is also faster, and the rates are competitive. However, you should have a good credit score.
Which Is the Best Personal Loan for Startups?
While you can access most types of personal loans, it is crucial to understand how to choose the best personal loan. The best personal loan for business is a government-backed startup loan. Though designed for businesses, startup loans are unsecured personal loans. These loans were introduced to help startups and small businesses access funding for various business activities, such as buying equipment or stock.
Small businesses can apply for different amounts of startup loans at different terms. Businesses also access mentoring and support from lenders to grow their startups. However, your loan application should include specific details, such as business information, how you want to use the loan, business plan, and cash flow forecasts. Similarly, as an unsecured personal loan, you should have a good credit score and show proof that you can afford monthly payments to get approved.
Endnote
Personal loans are a perfect financing option for small businesses that can’t access business loans. They have lenient lending requirements, don’t need collateral, and fast approval. Interest rates for personal loans are also friendly. However, you should use them according to lender provisions.