Starting a business can be a costly endeavour, but many financing options can help you fund a start-up. Personal loans are the most sought-after loan options because they are comparatively easy to apply. If you want to set up a start-up but can’t seem to meet the business loan requirements, a personal loan could be a viable alternative. A personal loan for business is given to the individual after the lender evaluates the personal income and creditworthiness rather than that of the business.
But is it a good idea to take funding for your start-ups through personal loans? Well, you can use personal loans for your start-up. However, some disadvantages come with taking out a personal loan for your business.
Pros of using a personal loan for a start-up venture:
- Personal loans are uncomplicated and more straightforward to be eligible for than a business loan. This is only because the lender relies solely on your personal credit history and finances. Personal loans are a preferable option for new businesses as it only uses your personal information to grant the loan. There is no need to provide elaborate business plans or documentation like you would for a business loan.
- While availing a business loan, lenders require you to put down inventory or similar assets as collateral. If you fail to pay timely, the lender has all rights to seize those assets. Because personal loans are not secured, there is no collateral requirement such as your house or car to secure the loan. As mentioned earlier, you can avail the loan based on your financial history, income or credit score.
- Personal loans have an option to submit a draw request to have the loan amount disbursed periodically. You may have to produce receipts, invoices or project budget documentation to showcase what the money will be used for. While with personal loans, you have access to the whole amount at one go.
Cons of using a personal loan for a start-up venture:
- Even though you’re using the loan for your start-up, the debt will still be in your name. Lenders may be less likely and prone to extend you credit or loans if it appears like you have plenty of debt. If you avail your loan and your start-up isn’t generating enough revenue to repay it, your credit score could suffer.
- A personal loan is technically a form of funding conceded to you to spend on yourself in any form like a vacation, a big purchase or to pay off debt. This way, a personal loan isn’t appraised as income for the same reason it’s called a loan. The money isn’t yours. Therefore, personal loans are not considered taxable income.
- To create a business credit score, you will have to register all accounts like loans and credit cards written to your venture’s name and identification number. Having accounts with a positive history on your business credit report can make it easier to qualify for small business loans, secure the best interest rates on financing and potentially qualify for lower business insurance premiums.
Using a personal loan to invest in a start-up, It is recommended that business owners who have excellent credit and don’t require a lot of money to bootstrap their operation. Although this option might not be the best or recommended for everyone, availing a personal loan for business can be a smart way to grow your start-up.
About the Author
Lily Tran is a content writer, working for MoneyTap Vietnam, who writes about all things Finance. Her passion for credit, debt, loan & investment drives her to help readers get an insight about everyday finance.