Anybody who has tried to get one will know that getting a bank loan for a new business is no easy ride. If you’ve tried to get funding from the bank and have had your application rejected, you might be wondering if it is possible to use a personal loan to start your company.
In most cases, you can use a personal loan for any purpose, including starting a business, as long as there are no limits on the terms.
However, it is important to bear in mind that a personal loan means that you have to do something that is best avoided; combining your personal and business finances – so it is usually best as a last resort.
On the surface, business and personal loans are fairly similar. They are typically structured in a very similar way in the form of either a credit card or a lump sum that is repaid with interest. Both business and personal loans can be obtained from a wide range of lenders including banks, online lenders, peer-to-peer lenders, and credit unions.
But when it comes to getting the right finance for your new business venture, there are some key differences between these two types of loans that it is important to be aware of. If you are considering using a personal loan to get your new business started, it pays to be aware of how the loans are different from one another.
Here is what you should know before you decide on the right type of loan for your business.
What is a Business Loan?
A business loan is a line of credit that is designed specifically for the purpose of financing a new business venture. They are most commonly used to cover the fees and expenses associated with starting a new business or to provide more cash for an existing business that is in a growth stage.
A business loan can be utilized to cover several business-related expenses including relocating, renovations, employing more staff members, marketing a product or service, investing in more equipment, purchasing inventory, and more.
Applying for a business loan gives you the opportunity to use your business’s financial reputation including its credit score or cash flow history to gain lender approval and access the funds that you need.
Business loans do tend to pose a greater risk to lenders compared to personal loans as they tend to be for much higher amounts of money, although you can find some small business lenders who are willing to allow you to borrow smaller amounts depending on your needs.
Lender requirements for a business loan can be quite demanding and often require the business to have a comprehensive financial history to show. This often makes it difficult for some businesses, especially those that are brand new, to get the right funding.
And, many business loans will come with strict terms regarding how the funding can be used. In some cases, borrowers may need to provide collateral to reduce the level of risk to the lender.
What Are Personal Loans?
Personal loans are used to finance personal expenses rather than business expenses. Some common uses include home renovations, purchasing a new car, or another large expense that would be difficult to finance through salary alone. Personal loans can also be used to finance a business venture in many cases.
Your personal financial situation, rather than the financial situation of your business, will be taken into account when you apply for a personal loan. The factors that are considered will vary between lenders so it is important to understand where you stand in terms of your own financial history and your credit score.
If you have a low credit rating, for example, you may get more luck with bad credit direct lenders in the UK. Payday UK allows you to search for short-term and longer-term loans that you are likely to be eligible for depending on your personal circumstances.
Simply enter the amount of money that you are looking to borrow and your personal details and this lender brokerage service will bring up a range of loan options that may be suitable for you.
A personal loan will usually allow you to be more flexible when it comes to how you use the money. In most cases, lenders do not mind whether you spend the money on personal expenses or starting a business – as long as you repay them on time.
Personal loans do not usually require collateral and in some cases, have lower interest rates than business loans. It is also easier to get a lower amount of funding compared to a business loan which is ideal if you only need a small sum to get started.
When Is Using a Personal Loan for Business a Good Idea?
Now that you know the difference between a personal and business loan, when is it a good idea to use a personal loan for funding your business?
Is taking out a personal loan right now a good idea, or should you wait for your business to grow enough to qualify for a business loan?
Although using a business loan to fund a new business venture makes sense logistically, securing this type of funding can be very challenging for businesses that are just starting out or in cases where the business owner doesn’t have a great credit rating.
Common Obstacles That Stand in the Way of a Business Loan
Your business will need to have a proven track record of financial stability in order for a lender to feel confident in financing your company with a business loan.
To be in with a better chance of getting the funding that you need, you will be required to have a clear and comprehensive business plan, reliable cash flow over a period of time, and a business that is clearly on the right track to success.
Businesses that are just starting out might not have all, or even any of these, which can limit your chances of success.
Situations Where a Personal Loan Makes Sense
While mixing your personal and business finances is best avoided wherever possible, there is no denying that in some situations, getting a personal loan out to finance your business makes the most sense.
If your business is brand new, for example, then you are probably going to struggle to get any type of business loan. In this case, a personal loan can help you access the funds that you need to get your business off the ground and grow it to a point where you are more likely to be accepted for business funding.
Another situation where you might prefer the idea of applying for a personal loan is if you do not need a great deal of funding to get started.
For example, if you are starting an online business that you plan to run from home, you may not need any more than a few thousand pounds to invest in some key equipment, build your website and purchase some inventory. It can be much easier to get a small personal loan compared to getting a small business loan.
If your business is very new and you do not have any collateral to offer a business lender, a personal loan could be a better alternative option since they do not usually require you to put down anything as security.
While it is not always the go-to option, there are some situations where funding your business with a personal loan makes the most sense.
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I am Adeyemi Adetilewa, a media consultant, entrepreneur, husband, and father. Founder and Editor-In-Chief of Ideas Plus Business Magazine, online business resources for entrepreneurs. I help brands share unique and impactful stories through the use of public relations, advertising, and online marketing. My work has been featured on the Huffington Post, Thrive Global, Addicted2Success, Hackernoon, The Good Men Project, and other publications.