Personal Loans for Small Business: Things You Should Know

Personal Loans for Small Business: Things You Should Know

A personal loan is one of the most preferred go-to financing options for borrowers. It’s usually unsecured, meaning it doesn’t require any collateral. On top of all, it has fast approval and disbursal of funds, making it one of the best financial avenues during lean times and emergencies.

Another advantage of a personal loan is that it’s very flexible. Much like the name suggests, it’s personal. In other words, it can cover any costs needed for your circumstances, including expenses for education, moving, wedding, renovation, big purchase, or funeral.

How about in business? Yes! You can use options like personal loans Illinois to get a start-up off the ground or provide financial backup in operating a small company.

The Best Time to Use a Personal Loan for Your Business

A personal loan is recommended if you’ve already exhausted other options with traditional business loan requirements. It’s also one of the good borrowing options if your credit is stellar, allowing you to secure a low annual percentage rate (APR).

Moreover, there are other specific reasons why you should choose to opt for a personal loan:

  • Your company is a start-up,
  • You need bigger funds, and
  • You lack assets to use as collateral.

Since it isn’t technically issued to your business, a personal loan can ding your credit score. It’s only a good option if you’re confident you can repay it. Remember that you’re personally liable for its repayment should your company go under.

Ways to Get A Personal Loan With Bad Credit

When it comes to qualifying for a personal loan and a lower interest rate, your credit score is crucial. You need at least a 610 to 640 score to be eligible for the loan and at least a 690 to enjoy better terms.

If you don’t have a stellar credit score or don’t even have one at all, you may get a cosigner on a personal loan. A cosigner is someone who guarantees your debt on your behalf, but it’s you who’ll pay off the loan.

Typically, you’ll take advantage of their creditworthiness, making you eligible to take out loans and get better terms. That also means if you default, their credit score will take a hit, and they must take full responsibility for your missed payments.

It’s often advised that you know your cosigner personally, usually your family members or close friends. Look for someone willing to put their credit on the line for you and commit to repaying the debt if you default.

Considerations Before Using a Personal Loan for Business

Compared to most business loans, personal loans offer a simpler application process and faster funding. However, this convenience comes with a lot of drawbacks, such as the following:

  1. Personal Liability

Lenders don’t require business owners to show any business interest and documents to be approved for personal loans. Instead, they’ll look at your credit as a deciding factor for your loan approval.

That said, you’ll be on the hook if your business fails to repay the loan as promised. In other words, if you make late payments or default, your credit will take a hit. Even worse, in the event of nonpayment, lenders can sue you and seize your assets.

  1. Future Borrowing Limitations

Since personal loans are based on your credit, taking out loans in the future increases your debt-to-income (DTI) ratio. A high DTI indicates you will struggle to make a new loan payment for most lenders.

What is Personal Loan: Personal Loan Meaning & BenefitsIDFC FIRST Bank

Consequently, having a high DTI makes it harder for you to get a lower interest rate or qualify for new credit, including auto loans, mortgages, and even some credit cards, until your business repays the personal loan you’ll take out.

  1. Tax Deduction Limitations

Most business loans have a tax-deductible interest. Business owners can write the interest portion of their payments off as a business expense, reducing their taxable income and saving more money.

This tax-deduction benefit doesn’t apply to personal loans. Business owners can only be eligible for a full tax deduction if they use the entire funds of personal loans for business purposes.

The problem is that not every lender allows using a personal loan for business expenses. It’s not recommended to hide the intention of using a personal loan for business from your lenders since you may get sued for breaching any loan terms. For these matters, it’s better to consult a financial advisor or a certified tax professional.

Final Thoughts

A personal loan comes with a lot of perks. It has unsecured financing, flexible funding, easier qualification standards, and hassle-free disbursal. It’s a great line of credit for any new or experienced business owner supporting strong company financials.

Remember to read and understand the loan conditions when applying for a personal loan for your business. If it’s unclear, clarify them with the lenders. More importantly, spend some time generating a solid business plan to understand your business and personal finances clearly.