If you own a business, there are many instances where you may need an additional influx of cash. You may need a loan to purchase new equipment, bulk up on inventory, or even invest in additional real estate to grow your business. If you are just starting out, you may need a loan to help get your business up and running. Regardless of why you need money for your business, you may find yourself wondering if a personal loan is a suitable option.
Unfortunately, the answer is not clear cut and largely depends on your financial situation, your business needs, and your personal preferences. Let’s take a look at some of the pros and cons associated with using a personal loan for business purposes.
Pros of Using a Personal Loan for Your Small Business
• Could be easier to qualify. If you are looking for a loan to start a business, you may have a difficult time getting approved for a business loan. Many lenders require a proven track record of business revenue, a favorable business credit history, or a minimum length of time in business before they will issue a business loan. It can be challenging, if not impossible, to get a business loan for a start-up on an idea or business plan alone. In this type of scenario, if you have a good personal credit score, a personal loan could be a way to get the capital you need to get a brand new business off the ground.
• Faster approval. Personal loans generally require less paperwork and documentation than a business loan, which could lead to a faster approval time. When applying for a business loan on the other hand, you may need to produce tax information and financial statements dating back several years, which can take time to compile and review.
• Lower interest rates than using a business credit card. Many business owners rack up debt on credit cards, which typically have extremely high interest rates. If your small business is looking to pay off existing credit card debt, or you need to make a large purchase and don’t want to add to your business credit card balance, a personal loan may be an adequate choice. Because personal loans have fixed payment schedules, they can be easier to pay back over time than a credit card, since your debit isn’t continuing to grow.
• Flexibility on spending. While some business loans may have restrictions on what you can spend the money on, most personal loans can be used for whatever purpose you see fit.
Cons of Using a Personal Loan for Your Business
• You put your personal credit on the line. It’s very important to be aware that if you take out a personal loan for business use, you are personally responsible for the outstanding balance. If you fail to pay the loan back, or routinely have missed or late payments, your personal credit score could take a serious hit.
• Personal assets could be required as collateral. While some personal loans are unsecured, meaning your personal property isn’t used to secure the loan, they typically have fairly low dollar amounts. If you’re looking to borrow a more significant amount of money, you may be required to use your personal assets (vehicle, home, land, etc.) as collateral, and failing to repay the loan could cost you those items.
• You may be limited in the amount you can borrow. With a personal loan, you’ll generally qualify for a lower amount than you would with a business loan. Depending on what you are trying to do with the loan, a personal loan may not offer you enough capital to fund your business improvements or expansions.
• Your interest rate may be higher than a business loan. Interest rates on personal loans are typically higher than the rates for business loans. In 2020 for example, the average traditional bank-issued small business loan had an interest rate between 2% and 13%, while the average personal loan had an interest rate between 5% and 36%.
• You could lose out on tax incentives. A personal loan is not tax-deductible. With a business loan on the other hand, the interest paid on your loan can typically be written off as a business expense.
• You could miss out on special business loan programs. In many cases, there are government programs for small businesses that could offer better terms than you would receive on a personal loan. For example, the SBA provides different types of loans for disaster assistance or, more recently, COVID-19 relief in the form of the Paycheck Protection Program, debt relief, and bridge loans.
• You’ll deny your business the chance to build its own credit. If your business is fairly new and hasn’t yet established a favorable credit history, you could be shortchanging your business by forgoing a business loan for a quicker approval on a personal loan. If your business doesn’t build up its own credit history, you may have a hard time securing business financing when you need it for larger expenses down the road.
Consider Your Individual Circumstance
Before making a decision about whether to apply for a personal or business loan, be sure to speak with your lender to ensure you understand the exact differences between the two. By conferring with a lending professional, you’ll also have the opportunity to lay out exactly what you are looking for, and receive guidance regarding what type of loan is the best fit for your business needs. Compare available lengths of terms as well. Personal loans are typically built on shorter terms like one to five years, whereas business loans may have longer repayment options. Your unique financial situation and what you’ll be using the loan for can both factor into what decision is best suited for you.
For more information on personal loans and business loans from BankFive, or to set up an appointment with one of our business lending professionals, contact us today!