When business owners, especially if they are very small or new, cannot access a business loan, resort to other sources of financing. One of them is a personal loan requested by the business owner. But would this money be enough? Can be. Consider that the amounts of personal loans vary between $1,000 and $100,000.
Also, interest rates for this type of credit could be as low as 4% or as high as 35%. The good thing about personal loans is that the approval period is usually much shorter, especially if the owners opt for innovative options, such as online loans.
- 1 Advantages of using a personal loan for your own business
- 2 Disadvantages of using a personal loan for your own business
- 3 How to get a personal loan for your business?
Advantages of using a personal loan for your own business
If you are thinking of requesting a personal loan to finance a project or remodeling in your business, or perhaps the development of a new product or the implementation of the latest technology, You could take advantage of certain advantages, such as the following:
They will not ask you for the commercial credit of your company
Since the loan holder will be you or the partners of the company, the bank or lender will not verify the commercial credit of the company. Thus, the business will not need to have a good credit score might even have a poor one. Nor will you need to explain to the bank why your company has no credit; something that happens a lot when companies are new.
It is not necessary to separate the company from the owner
The United States is one of the countries in the world that has more individually owned businesses than corporations and stock companies. In fact, there are 23 million companies in the territory that are managed as sole proprietorships. Since it is not necessary to separate the business owner from the company, the owner will be able to request a personal loan when he needs to finance his business.
You can easily predict payments
Personal loans are “installment loans”. What does this mean? That you will request a fixed amount of money as a loan to repay it within a certain period of time. Unlike credit cards or revolving lines of credit in which the monthly payment varies depending on the outstanding balance, with this type of loan you will always know how much you must pay each month to pay off the loan in a specific period of time.
Most lenders offer short-term loans, that is, 3, 4 and 5 years in duration; although some lenders even work with much longer repayment times.
Financing a startup will be much easier
Startups often have certain financial limitations. In fact, getting a loan for a business that’s been in business for less than two years and doesn’t have significant revenue, could be quite a challenge. yesHowever, if the owner agrees to a personal loan, he is not required to provide the bank or lender with information about his business. In this case, the startup could take advantage of these financial resources, regardless of how long it has been in the market.
Disadvantages of using a personal loan for your own business
Although personal loans could be very useful, They also have certain disadvantages that you should analyze, such as:
The lender will check your personal credit score
The decision to request a personal loan will lead to the review of your own credit score with at least one of the main agencies in the countrysuch as Equifax or Experian. Simply applying for the loan will leave a verification note on your credit report. This process is called “hard inquiry” and it slightly but negatively affects your score. However, some lenders use a soft credit check (known as a “soft inquiry”). In this case, your score will not be affected.
Your credit score could drop
This is closely related to the previous point. Remember that each loan you request will appear on your credit report and will be taken into account for the calculation of the score. Even if you pay on time, this loan could have an impact on the credit rate used or the credit limit available, to name just a few examples.
The bank could request a personal guarantee
As personal loans are granted to an individual and not to your business, they may request a personal guarantee that assures the bank or lender that they will be able to collect the debt in case you cannot pay on time. What guarantees could they ask for? The title of the car, the house, the balance of a bank account, among others.
How to get a personal loan for your business?
Although most lenders, especially banks and credit unions, offer personal loans to his clients; some of them prefer to instruct applicants to apply for a new credit card. However, there are other options available on the market.
For example, there is a wide variety of online lenders that offer personal credit products. There are also credit card issuers that have a personal loan portfolio. Our recommendation? Analyze these options very well, since, depending on your situation, requesting a personal loan online could be a great idea.
Note: Before submitting your application, check your credit reports in the three main bureaus in the country: equifax, TransUnion Y experience. This way, you can make sure that you have good credit and that your reports do not have errors that you have to correct before starting the application. It is also desirable that you analyze your current financial situation very well because you must ensure that you have the necessary solidity to take on a loan at this time.
Remember: Checking your credit score will not have a negative impact on your score because the credit bureaus consider this action a “soft inquiry”.
Before requesting your personal loan for companies:
Before requesting a personal loan to finance your business, study the costs associated with the loan, especially:
- The APR. In addition to the interest rate, you will see that the loan you want to request is linked to an APR (Annual Percentage Rate), which is the annual percentage rate. This factor takes into account other costs in addition to interest, such as the fee or commission for the credit application.
- Associated fees. Remember that lenders may charge certain loan application fees, annual maintenance fees, default insurance, late payment penalties, etc.
Warning: Do not transfer money to any lender or individual before they have granted you the loan. The Federal Trade Commission has repeatedly warned consumers that there are many scams in terms of personal loans, especially online, where certain individuals take advantage of these borrowers’ need for financing.
Requesting the personal loan for your business
The higher your score, the more opportunities you will have to access credit with an attractive APR, and vice versa.. Some lenders make loans to consumers with low scores (close to 600 points) while others may require a much higher score.
Remember: The lender may ask you certain questions related to your income and your current employment in order to determine that you have the financial capacity to take on the loan and pay it back in a timely manner. The requirements to apply and be approved for a personal loan vary depending on the bank or cooperative, but keep in mind that most lenders won’t disclose the minimum amount of income you must have to qualify.
Note: Some information, such as your education or employment history, could help you qualify as a beneficiary of a personal loan.
Receiving the personal loan for your business
If the bank or credit union approves your application, the funds will be deposited into your bank account and you can use them in any way you prefer. However, remember that starting and running a business is risky, so it would be best to prepare an action plan before using the funds obtained.
If you don’t have a savings account for your business, consider setting aside a loan amount to use as an emergency fund. This will help you in case your cash flow decreases in the future.
Recommendation: Not sure how much your emergency fund should be? Experts recommend that it be equivalent to 3-6 months of the company’s average income or 3-6 months of expenses and operational costs.
Remember: Paying your loan on time will allow you to enjoy better credit in the future. In addition, as long as you are up to date you can get rid of the fees associated with delays, penalties and the application of additional interest.