Launching a small business is an uphill task. It requires a lot of time, patience, planning, and often a lot of money than you may anticipate. Luckily, there are funding options that aspiring small business owners can take to their advantage. One most common and widely adopted option is the personal loan.
So, if you are a small business owner and looking for funds through a personal loan, this guide fits the bill. Moving forward, we will see what a personal loan is, how you can apply for it, and what factors you should consider before applying for it.
What is a Personal Loan?
A personal loan is a line of credit that is typically used for large purchases. As the name suggests, a personal loan covers the cost of anything important to your personal circumstances.
There is no general rule about where you should use the loan. However, you will have to explain your plan before applying for the loan. A personal loan carries a much lower interest rate than credit cards. For instance, the average APR for a two-year personal loan is 9.58%, while the average APR for a credit card is 16.30%, according to the Federal Reserve.
It is worth mentioning that personal loans generally have a set repayment period. It can range from a few months to a few years.
Can I Use Personal Loan to Pay For My Small Business?
The short answer is yes! You can pay your small business expenses with a personal loan. Once you are approved for a personal loan, you can use it in any way that makes sense. If you start a small business, you can use the personal loan to cover anything from inventory to payroll to rent.
However, consider doing it at the lowest possible cost to you. It means taking out the loan with the lowest possible interest rate.
Once you know what a personal loan is, let' s now move to the critical factors which one must consider before applying personal loan to start a business.
5 Factors to Consider Before Applying for a Personal Loan
1. Lender Does Not Have Any Restrictions
Before applying for a personal loan, one of the most crucial factors to consider is whether the lender has any restrictions regarding the use of money or not. Some lenders may have a limitation list, and it may include business. The reason is that there is a separate loan for a small business where the borrowers are asked to submit the business documents. So, always ask first about the restrictions to avoid any inconvenience.
One of the best ways to do this is, to be honest about your intentions and let the lender know that you may use the money for your business. If the lender is not okay with that, you may look for other lenders in the market.
2. Opt for Unsecured Personal Loan In the Absence of Collateral
If you do not have any collateral that you can use to secure your business loan, opt for an unsecured personal loan. If you take a secure loan and fail to make payments, the lender will have the right to seize your assets, including your house, car, or inventory) that you provided as collateral.
Although personal loans are typically unsecured, some lenders may ask you to secure the loan with an asset. It is advisable to look for more lending options in such a situation.
3. Figure Out How Much Money You Need
If you are taking out a personal loan to start your business, you must have a clear idea of how much money would suffice for your needs. Before applying for a personal loan, make sure you plan it out.
For a general idea, most SBA loans allow you to take up to $5 million for small business expenses. Most personal loans lenders can approve you for up to $100,000. So, create a business plan and budget everything before applying to know how much money you require to start your small business.
4. Personal Loans Are Tied With Personal Credit History
Your personal credit history will be directly affected since you are taking the loan on personal terms and documents and not on business documents. So, if you fall behind on payments, your personal credit score will suffer as a consequence.
It can complicate things for you when you try to get approved for other lines of credit like a new credit card, mortgage, or car loan. Thus, consider this factor when choosing a personal loan for your small business.
5. Assess Your Payback Ability
It is essential to understand your ability to repay to avoid any financial blunder. Try listing out your monthly income and expenditures to see if you can repay the amount you wish to take for your small business. Use a loan calculator to calculate your monthly payment.
For a better idea, use the monthly repayment calculator on the bank's website to understand the repayment amount each month. It is also essential because late payment may result in penalties, overdue fees, and bad credit ratings. If your budget does not allow it, do not take a full loan, or it will cause you unnecessary debt.
Top Seven Lenders For Personal Loans in the US
The Bottom Line
Personal loans are an effective way to cover expenses to get your small business off the ground. The type of lender you pick depends mainly on how much money you need, where you can get the lowest interest rate, and whether or not you want to put your personal credit on the line.
While applying for a personal loan for a small business, please read the loan conditions because a few lenders might not allow you to use their funds for business purposes. If the conditions are not clear, ask the lender directly. Also, make sure you spend some time creating a business plan and a budget that will help you clarify your needs.