Even though common sense might suggest a business loan is the most appropriate choice when you need to finance your business, personal loans remain a popular and viable option for this purpose. As with any business decision, there are pros and cons to both methods. Before you dive in, it's important to weigh your business and personal needs and to examine potential outcomes and repercussions.
Personal Loans for Business
Personal loans are usually easier to obtain than business loans. Whereas personal lenders will usually just take a look at your credit score when deciding whether to lend to you, business lenders will examine your personal credit, your business credit, your business plan, and a host of other financial statements and records from your business. This process can be time consuming, devouring a resource many business owners don't have enough of! Business lenders are often much stricter and tight-fisted than their personal counterparts.
Another benefit of using a personal loan for business is that personal loans are usually unsecured. This means you don't have to put up collateral to get the loan. If you don't have collateral, it can be a barrier to obtaining a business loan.
One of the pitfalls of using a personal loan for business is that the lending limits are typically lower and the interest rates are generally higher. You might not be able to secure all the money you need with a personal loan. And the higher interest payments can erode a percentage of your profits.
Additionally, by using a personal loan for business purposes, you are denying your business the opportunity to build its own credit, which can help you procure additional financing options as the business grows. Also, with a personal loan, if the business defaults, your personal credit will take a hit. A failing business and delinquent personal credit score can be difficult to recover from.
Business loans can help separate your business and personal finances, which is particularly important as the business grows (and come tax time!). Depending on the individual loan, business loans can limit your personal liability should the business default or encounter other financial difficulties during the loan term.
The responsible use of business loans will help build financial credibility for your company, which will open doors for other opportunities that can help you grown and expand, such as higher lending limits and trade credit with vendors and suppliers.
Business loans can be difficult to obtain if your business hasn't established its own credit or if you have less-than-stellar personal credit. The process can be tedious and lengthy, filled with paperwork and rejection. For a hopeful entrepreneur who wants to dive right in, waiting for loan approval can be torturous and might mean missed business opportunities. Additionally, depending on your situation, you still might have to provide a personal guarantee for your business loan, meaning that you are personally liable for repaying it if the business defaults.
The decision between using business loans and personal loans for business can be a difficult one. Research your options and consult with your financial advisor to determine which is the best match for your individual situation.