Can You Use a Personal Loan for Business?
For a self-employed entrepreneur at the initial phase of business, getting a traditional business loan is tough, especially compared to personal loans.
A personal loan is known as a loan that is not secured against any asset. Whether you are going through a cash crunch in organizing a wedding or looking for some extra funds to finance your next international tour- personal loan is the perfect option to avail the loan.
In this article, we will discuss important aspects – is personal loan beneficial when it comes to investing in for business purposes.
Can you use a personal loan for business? How the personal loan for a business is different from that of the business loan?
Let’s find out the answer!
Starting a business is no piece of cake. From the idea itself to its eventual conception, turning a dream idea into something tangible and profitable is a feat that a few can do.
However, it is not impossible. In the present fast-paced world, opportunities for investment are numerous, with seed capital, fund-raising platforms and networking opportunities at just a click away.
Whether you are just at your beginning phase, or have been established for years, you might consider taking out a loan to get some extra funding to accomplish your recent business goals.
Apart from the specific business loans, you can also go for personal loans to fund a new or existing business. Before you apply for any personal loan, make sure to check that the lender does not impose any restrictions for business uses.
It is worth reading the loan’s conditions beforehand to see what is allowed or what is not allowed. Also, lenders will inform you about their personal loans where they can be sued and some will allow commercial uses while others will not.
In case, you are not sure whether a lender allows you to use a personal loan for your business purpose, you must be honest about your intentions as a borrower so that lender is aware where they stand. For better clarity, ask the lender, “Can you use a personal loan for business?” instead of hiding your actual intentions.
Here, the decision depends on a different factor and hence needs to be looked at carefully. Ideally, a business loan is used to finance the needs of your business, but you can use a personal loan also in the following cases:
Small Requirement: If the amount you need for your business is small, you can take a personal loan for business. The application process is generally hassle-free and it does not need the same level of documentation that a business loan needs. If you need a few lakh of rupee, it is okay to take a personal loan.
Collateral: As you know personal loans are unsecured loans; means you have an advantage here that you do not need collateral to avail it. While on the other hand, business loans are almost secure in nature, you have to provide collateral to avail it. In case, you do not have collateral or you do not want to provide one, personal loan is a good option for you.
Period of time and Repayment: Another factor to answer can you use a personal loan for business? If you need a sum of money to get over a temporary shortfall in money, it is a good decision to take a personal loan.
Although, you have business loans that help in such situations, the relative ease of getting a personal loan makes it an attractive option. Also, if you are fully sure that you can repay the amount within the stipulated time then it is completely fine to take a personal for the business. One thing to keep in mind that the interest rate will be high here.
Faster Process: Business loans taken for approval. This kind of loan generally has a large number of documents that need to be submitted, from the business plan to books of accounts.
Getting the documents in place and then finally availing the loan takes time. So if you urgently need money and cannot afford to wait, you can go for a personal loan that can be sanctioned within a couple of days. The select depends on the urgency behind the need for funds.
Exhausted Other Options: Finally, when all other avenues of loan have been exhausted, taking a personal loan might be the single option left. However, a personal loan also depends on the credit profile of an individual borrower. If you already have other loans active, varying as per your income, you may or may not be able to avail a personal loan.
With a new company, it is actually very tough to avail a business loan. But getting approved for a personal loan is easier because the lender looks at your credit history and income, not your business’s finances. Unlike business loans, for personal finance you do not need to provide extensive business plans or documentation; also the terms can be more favourable to you.
When you apply for a SBA loan, it can take weeks or even months. In contrast, your personal loan can be disbursed in a matter of days.
Most business loan lenders ask you for assets like your inventory as collateral. And when you fall behind on your payments, the lender can seize those assets. Personal loans are generally unsecured and they do not need any collateral.
When you decide to take a personal loan for business, you put your own credit on the line. In case, your business fails or you fall behind on your payments, your credit score can also plummet.
And a low score and a history of late payments can make it tough to get approved for other forms of credit. Even if you make payments on time, a personal loan can hurt you in other ways.
When you take a personal loan, it raises your debt-to-income ratio, which can make it more difficult to qualify for a mortgage, car loan or a new credit card.
When you go for a business loan, you can borrow a huge amount while personal loans have much lower maximums. If you need a loan for a big investment, personal might is inadequate.
Although personal loan lenders advertise low rates, they keep those rates for applicants having great credit scores and high incomes. If your credit is less than stellar or your earning is not so high, you might be stuck with a high rate of interest.
Business owners take a personal loan for business to build their infrastructure that will help them create a peaceful environment to work in, hence enabling the business to grow in size as well as revenue.
Personal loans are taken to cater the demand for product or service. You may need to introduce new technology or increase your current production capacity by adding new equipment to your business. A personal loan can be an ideal option to meet the demand for additional capital without it being an extra financial burden.
If your small team is overburdened, there is risk of your business failing over a period of time. Taking a personal loan to meet the expenses of hiring new employees can even out this burden and you can easily focus on growing your business. A personal loan for self-employed can give you wings to fly.
Suppose, you just seal a good deal, you may need to increase the production capacity of your business that may need you to buy raw material to cater to the high demand. A personal loan for self-employed can be a great solution here.
No doubt, inventory is a huge expense, but you also need to keep on replenishing your inventory to tackle the demand. You can take the personal for business to purchase inventory to grow your business.
A personal loan for business can help you take care of your ancillary expenses like salaries, raw material, utility bills and supplies without slowing down your operational activities when you stuck in a cash crunch.
Just like anything in life, when thinking about getting a loan ask yourself, do I really need it?
Whilst it is by no means guaranteed that a lender will give approval for a personal loan for business purposes, those who are involved in research and are clear about their objectives may find lenders providing a variety of personal loans suiting your business uses.
As always, comparing lenders and different funding options is vital. You need to go through different factors like how much money you need, how quickly you need it and what your current situation is.
Whether you want to take a business or you are thinking of using a personal loan for business, do not forget to check your eligibility before applying as a rejected credit application or failure to repay any kind of loan will ultimately affect your credit score that can result in severe financial repercussions.
Hopefully, you have found this post interesting and helpful. Share what you think you should use a personal loan for business or not. Let us know in the comment section below.
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