Should you finance your business with a personal loan?
When you launch a business, or want to finance your business for growth, you may think that the only option for readily available cash is to apply for a business loan. While business loans can be good solutions, entrepreneurs often find that personal loans offer more benefits and flexibility, especially when you’re just starting out.
According to Lisa Gerstner, contributing editor for Kiplinger’s Personal Finance, “A personal loan may be easier to get than a business loan, especially if you’re just getting your business off the ground.”
Here are five advantages of using personal loans to finance your business and reach your goals:
1. The credit rating of your business doesn’t matter.
Getting approved for a business loan can hinge on your business’s credit rating. If it’s still in the planning or research stages and doesn’t have any relationships with creditors, you may find it difficult to get funding.
But having a thin or nonexistent credit history for your business doesn’t matter when you apply for a personal loan. If you or a business partner have good credit as individuals, getting one or more personal loans can be straightforward.
2. You don’t need strong business financials.
When you’re just starting your business or spending capital to expand it, your company financials may not be strong. If revenue, expenses and other key underwriting metrics don’t meet a business lender’s minimum requirements, you’ll probably be turned down for a loan.
However, underwriting for a personal loan only depends on the health of your personal financial situation. If you can demonstrate reliable household income and assets, you’re in a good position to be approved.
3. You don’t need business collateral.
Business loans are typically secured by collateral — such as your business equipment, accounts receivable, property and inventory — that are possible sources of cash if you’re unable to repay the loan. Or the lender may require a general lien on your business assets to secure a debt.
If you don’t have collateral for a business loan, or you operate in a risky industry, an unsecured personal loan can be the ticket for a much-needed cash infusion that a business lender wouldn’t consider.
4. You can spend the funds any way you like.
In many cases a business lender requires you to provide ongoing financials so they can see how you’re spending their money. They have a duty to keep an eye on your business so they know if it’s healthy enough to repay your debt.
With a personal loan, it doesn’t matter how you choose to spend the funds. They could be used for personal expenses, such as making home repairs, going on vacation or consolidating debt. Or they can be used to finance your business, expand, ramp up marketing or hire new employees. After all, it’s your business, not the lender’s.
5. You receive funds faster.
Most business loans require much more paperwork and scrutiny than personal loans. Businesses are inherently complex and require analysis that can take lenders weeks to complete and fund.
In contrast, many personal loans offer immediate approval or denial. You could even receive a personal loan deposit into your bank account within just a day or two. That makes it incredibly convenient when time is of the essence to achieve your business objectives.
Using personal money to finance your business
Be aware that when you use a personal loan for your business, you’re intermingling personal and business finances and need to keep solid records. Whether you consider the funds an investment in your business or a loan is an important tax consideration.
Consult with a tax accountant or attorney so you receive guidance about tax consequences and necessary paperwork, that defines terms and future expectations, when you or a business partner put your own money into your company.