Can You Get A Personal Loan To Start A Business?
Is it possible to get a personal loan to start a business? Neal Business Funding and other providers do offer personal loans to start up a new business. That makes the short answer yes, although there are many factors involved with this, as well as numerous benefits and drawbacks to this. Keep reading to learn the basic ins and outs of all this. Weighing the pros and cons should help you make an informed decision.
What Is The Best Personal Loan To Start A Business?
The best personal loan to start a business is usually an unsecured business line of credit. This is a kind of revolving debt which you can get without having to pledge any collateral to a lender. In the right circumstances, it’s an ideal option for someone who is just starting out. However, a good credit score is typically necessary. While every case is unique, you might need a credit score of 680 at a minimum for consideration, if not even higher.
On top of having rock solid credit, you’re likely going to need to demonstrate reliable and sufficient income to highlight your ability to repay a loan. While you want your business to launch and repay a loan, the lender is going to be more concerned with whether or not you can personally repay the loan. So, a good paycheck from a 9-to-5 or conventional job might be a requirement, unless you can perhaps show alternate forms of income, such as rental properties or an annuity and the like.
How do you start a business?
Starting a business requires resources. This might be called collateral or capital, but whatever you call it, you can’t make something out of nothing. Even those that start an eBay selling business by selling things out of their garage, closet, and attic still have to invest time in taking pictures and writing out their listings. They also have to pay for those listings, even before they start getting paid for things that do sell.
Startup Financing
Start-up financing is a huge hurdle for small-business owners. There are loans specifically for small businesses through banks, online lenders, and credit unions, but if you’re not a small business yet and still just a private person, then getting one can range from hard to nearly impossible.
This is where an unsecured personal loan from those same financial establishments can get used for funding your fledgling business. An unsecured loan is one that doesn’t require collateral, such as a car title or the deed to your home. Also, you can pay the loan back. Repayment plans are typically done with fixed monthly installments ranging anywhere from two to five years.
If the personal loan doesn’t have any business restrictions, then you can use the funds to buy equipment, build up your inventory, launch your marketing efforts, and just generally cover any other start-up costs you hit along the way.
The Advantages of an Unsecured Line Of Credit
Personal loans generally let you apply the funds as you see fit. For your business, you can spend on anything from office supplies and making marketing flyers to working on product development. However, if you’re a sole proprietor just working from your home, then you can use the same funds to handle personal expenses that might pop up before your business is profitable enough to live off of.
Another benefit of using a personal loan to get your business started up is that you might get a lower APR than you would if you just used a credit card. If your credit score is good enough, then skipping the credit card can save you money throughout the duration of the loan. The interest just wouldn’t pile up as quickly because of lingering revolving debt being shuffled around repeatedly.
Easy Approval
Ease of qualification is another potential benefit of an unsecured personal loan. If you have no previous experience or history in doing business ventures, then a personal loan might just be easier to get than a small business loan. When lenders underwrite business loans, they factor in things like how long your company has been in business and what the revenue looks like at the time; this happens on top of your own personal credit score. If you’re a first-time entrepreneur and your business is brand new, then you’re obviously not going to have the history that lenders want to see and analyze. However, your personal loan can be qualified off of things like your credit score, your income from your ‘day job’, and other assets such as rental properties and their income.
Yet another advantage is how much less paperwork there is. A business loan usually means having extensive documentation and plans laid out. This isn’t necessary for a personal loan.
Your terms might also be truly favorable, if you have great credit and stable income. A personal loan lender might provide you a rate with very low interest. Under 5 percent isn’t unheard of. Some business loans carry hefty interest rates of as much as 36 percent. This is especially true if you rely on credit card funding to get your start-up off the ground.
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You’ll also get the funds much faster. Personal loans are often disbursed in just a matter of days. On the other hand, a Small Business Administration loan, which is a frequent source for business financing, might mean waiting weeks and even months.
Potential Drawbacks
For all the possible benefits of using personal loans to get your business started, there are potential drawbacks and risks that you need to be aware of.
For starters, there are not going to be any tax credits in most circumstances. A business loan might let you claim tax credits for interest payments you make, but this rarely happens with interest payments for personal loans.
Loan size can also be an issue. Personal loans are typically available in loan amounts far smaller than what can happen with business loans. This might not be a real constraint for a small startup, but if you’re thinking really big, you could find yourself choked by this limitation. Unsecured personal loans frequently get capped at $100,000, which is often more than enough to start a small business from scratch. However, if you need more, SBA loans are sometimes available for as much $5 to $6 million.
You’re also going to be on the hook for paying back the loan. Of course, you’re optimistic enough to believe that your business will succeed and the profits and revenue will take care of the personal loan. Hopefully, you’re right. However, in reality, half of all new start-ups close down for good within five years of starting up. If that happens, then the business you start will be gone, but you’re still going to be personally responsible for paying back the loan out of your own pocket.
You can get a personal loan to start a business
The central question that started all this was whether or not a personal loan could be used to start a business. The answer is yes, and establishments like Neal Business Funding and others provide unsecured personal loans for those that want to start up a new business. However, you have to meet stringent criteria. There are numerous advantages to doing this, but there are also some drawbacks and inherent risks to it too.
A personal loan to start up a business can be easier to get and with less paperwork. The funds can be used as you please, and they are disbursed faster in most cases, and possibly with lower interest rates. However, there are not as many tax benefits, and you’re still responsible for paying it back even if the business fails.
Hopefully, the information presented here helps you make an educated choice about what is right for your situation.
