Should you use a personal loan for businesses?

Have you ever considered taking a personal loan to drive your business? In contrast to business loans, personal loans fall in the category of unsecured loans that will be given to individuals based on their credit scores and income. Most importantly, personal loans provide you with the flexibility of using the funds in any manner you would prefer.

Instances where personal loans prove useful for businesses

Personal loans can help if you’re starting off with a new business venture and seek funding for that. These loans also help you out if you need small sum of money for your business. There are several scenarios where you would ideally opt for a personal loan in place of a business loan to fuel your business requirements. Let’s elaborate upon some of the instances.

Requirement of a small amount of money for your business

You might face a situation where the requirement is for a smaller amount of funds for meeting business requirements. Such a requirement is particularly observed in case of startups. More funds come into the picture only when the business grows or have plans of expanding.

But, banks don’t easily grant you business loans of small amounts. This is when a personal loan might really prove useful. Personal loans give value back to the banks and are comparatively easier to obtain. Thus, if the requirement for funds is minimal, you could ideally opt for a personal loan.

Personal loans can help you at the early stages of your business venture

At the beginning stages of a business, most of the aspects may not appear well-organised. As a result, new businesses often face reluctancy from the bank’s end in obtaining business loans to finance their organisation needs. Besides, even if the bank grants you the business loan, it often takes a lot of time and effort.

In such cases, you might consider opting for a personal loan as it not only addresses the immediate requirement for money, but is also more easily accessible compared to a business loan.

Absence of collateral

Business loans usually require you to submit a collateral. But, when you start off with a new business, there is always a lack of assets. As a result, submitting a collateral might seem like an uphill task for startups and new businesses. In the absence of a collateral, you might not be able to get a business loan, thus impacting your overall business strategy.

Hence personal loans would actually prove helpful for startups or smaller businesses, as it eliminates the need of a collateral.

Downfalls of using personal loan for businesses

Undoubtedly, personal loans can help meet certain financial requirements of your business. However, if you choose to take this route, there are some factors that you should be aware of. We shall discuss the primary disadvantages of using personal loans here.

Higher rates of interest

Personal loans are usually characterised by higher interest rates, compared to business loans. So while a personal loan can surely help you in terms of financing it will also cost you more in the long run as you have to pay more in terms of interest charges. You would ideally want to avoid the unneeded interest charges.

Minimum borrowing limit

Business loans usually offer higher borrowing limits compared to personal loans. So, if you’re looking for a larger amount of funds to drive your business, a personal loan wouldn’t quite meet your requirements.

Borrower’s responsibility for the debt

In case of business loans, the responsibility is borne by a company. If there’s default on the repayments, your business will take a hit. However, the bank can’t seize your personal possessions in such an instance. However, an individual borrower is responsible for a personal loan. This makes him liable for clearing the debt.

Should you rely on personal loans?

Personal loans can actually prove to be useful for your business, if you’re looking for a nominal sum at a short notice period. These loans can specifically be more beneficial in case of startups. However, you should also keep in mind the pitfalls of using a personal loan for business requirements. Ideally, you must look around and compare other loans or financing options too.