Personal Loan: Is It Right for Your Business?

Starting a business can be one of the most exciting and fulfilling endeavors out there.

With all the highs and lows involved, entrepreneurship certainly beats a desk job any day. However, as any entrepreneur can tell you, this kind of work isn’t for everyone because it involves an appetite for risk. Taking a risk with finances is what makes many new entrepreneurs nervous.

If you don’t have the capital or if your other financials aren’t near the minimum amount necessary for business lenders, taking out a personal loan is the next best way to subsidize your business. But before you head to your nearest lender, it’s also important to evaluate your loan readiness.  

The Importance of Evaluating Your Loan Readiness

In simple terms, loan readiness tells a lender that you have the financial capability to pay off your loan, no matter how small it may seem.

There are many things that are taken into consideration when you borrow money: your personal credit score, monthly income, monthly expenses, business tenure, and how much savings you have in the bank. All of this information tells a lender whether or not you can pay off your debt.

Once you have determined that you are loan-ready, then it’s time to apply for a loan. But what kind of loan should you be applying for?

Why Not A Business Loan?

Business loans are primarily available for business owners who need some financial cushioning to solve a problem. It could be taking your business in a new direction, hiring extra talent, or investing in new equipment.

But large banks have become strict with the requirements needed to obtain a business loan. As a result, many small business owners can no longer avail of these much-needed financial services. Thankfully, there are alternative lending schemes that are designed to help small business owners.

The downside for small business owners is that these loan options tend to be more expensive, and are extremely challenging to secure.

The Solution: Personal Loans

Both new and seasoned amateurs know that personal loans are the way to go when it comes to funding your business.

Though these loans are usually taken out to pay for large purchases such as a home or a car, emergency repairs, pay for a wedding, or other personal matters, your business can also benefit from a personal loan.

The main difference with personal loans is that they are available on much smaller amounts. That’s because they are only designed to cover your individual needs instead of your business. But you should consider opting for a personal loan to help start your business or cover certain aspects of it that you just don’t have the funds for at the moment.

Kinds of Personal Loans

There are two main kinds of personal loans: secured and unsecured.

1. Unsecured loans are those that are not backed up by collateral. It is your financial history that qualifies you (or not) based on the lender’s requirements. Some lenders can offer you secured options if you don’t meet the requirements for an unsecured loan.
2. Secured loans are those that are backed up by collateral. This means that you’ll need to prove you have enough savings in the bank, or have assets to give up, if you cannot make your payment. In that case, then the lender has the right to claim either cash or assets to cover the loan.  

Here are some benefits of using a personal loan for your business:

1. Collateral may not be required: Some unsecured personal loans don’t require collateral from borrowers. If you end up defaulting on your unsecured loan, there are harsh consequences but this doesn’t mean that you have to give up your home, car, or valuable family heirloom for it.
2. Potentially higher borrowing limits: Personal loans, depending where you obtain them, may have higher borrowing limits compared to credit cards. So, if you were thinking about using your credit card instead, this is a good reason not to. Keep in mind that the borrowing limits vary depending on the lender, but there are many generous ones out there.
3. Lower interest rates: If you look well, you may be able to find and be approved for a personal loan that has lower interest rates than a business loan – or even a credit card.

Having said that, it’s also important to keep in mind that you should avoid mixing financials. This means that it’s in your best interest to never combine personal and business money issues, so you should keep track of each of them separately. And, as soon as you can, work on starting business credit.

It’s also good to note that there are personal loans that will require you to pay closing costs. So, if you are taking a PhP 500,000 loan, there may be a PhP 50,000 closing fee involved; though you will only be paying interest for the PhP 500,000. This is standard practice for many lenders.

Conclusion

Taking out a personal loan to pay for your small business needs is a safe and viable option.

The most important thing you need to keep in mind, as mentioned earlier, is your appetite for risk. That, along with how comfortable you are in the amount of debt you’ll be in, is crucial in ensuring that you can indeed afford to pay off your loans while avoiding the feeling of being trapped.