Starting a business means finding money fast. But what type of loan do you need? Here’s when to use a personal loan for business and why it’s a good option.
Believe it or not, more than 627,000 small businesses get started each year. No matter what industry they serve, they all have one thing in common.
They need money to get off the ground.
So, how can you get funding? One option is to take out a loan.
Traditional business loans give you access to large amounts of money to fund your company. But, what if you don’t want to go into tons of debt?
There are options. For many business owners, taking out a personal loan for business expenses is the best choice. After all, traditional business loans carry restrictions and can be hard to qualify for.
Here’s when to use a personal loan over a traditional bank-issued business loan.
You Have Great Credit
Almost all loan providers look at your credit score before making a decision. If it’s high, you’ll probably qualify for a great loan.
If it’s low, you might find it harder to get financing.
Let’s assume you have great credit. That means you’ll qualify for a personal loan with a lower interest rate. As a result, you can borrow more at any given time.
This means you’ll get a personal loan with favorable terms pretty easily. When you’re in need of funding, ease makes all the difference.
Banks Have Turned You Down for Business Loans
Good personal credit isn’t all you need to get funding for your business. You also need a good business credit score…if you’re looking for a traditional business loan.
So, how do you get a good business credit score? You make profits month after month. You have existing lines of credit with vendors or other loans from banks.
It takes time to build your business credit score. When you’re first starting out, you’ll need money to do it.
Using a personal loan for business expenses makes sense if you can’t get a traditional business loan. You’ll still get the money you need, but you won’t have to deal with the hassle of arguing your business’s case with a bank.
The Business Isn’t Open Yet
You need money to make money, but if your business isn’t open yet, getting a business loan is almost impossible.
Sure, there are start-up loans, but those often have high interest rates. High-interest rates mean high monthly payments.
Standard business lenders like to see a history of profits before giving you a loan. But small personal loans don’t take business practices into consideration. Instead, they look at your personal finances and credit score.
Personal loans give you the money you need to get your company off the ground. They do it even when you’re not open for business.
You Don’t Have Enough Collateral
Investing in businesses is risky. Most traditional lenders like to hedge their risk with collateral.
These are items you put up before you receive the loan. If you default or the business fails, the lenders receive these items.
It’s a way of making a bit of money back even if you don’t repay the loan.
For new business owners, you might not have enough collateral in the first place. This means a bank might not give you a loan because they see you as too risky.
Once you’ve been in operation for a while, you’ll have enough collateral to consider applying for business loans. But what do you do in the meantime?
You take out a small personal loan.
These lenders don’t base their decision on the type of collateral you have. So, if you have none, you’ll still qualify for a loan.
You Need to Cover More Than One Type of Expense
When you take out a business loan, you’re limited in how you can use the money. Banks and lenders put restrictions on certain types of loans. If your intended use is something different than the loan you applied for, you won’t qualify.
This makes it hard for businesses that need to use the money for different things.
But a personal loan doesn’t have those restrictions. You’re free to use the money however you need to. And you can split that up between business and personal use.
For example, maybe your business needs a few new computers. But you also need to pay your home’s electric bill you’ve gotten behind on. A personal loan can cover those costs.
And no bank or lender will tell you how you can and can’t use those small personal loans.
You Don’t Need to Borrow a Lot
Traditional business loans are great when you need to borrow a lot of money at once. But most small business owners don’t need to borrow tens of thousands of dollars. Or they don’t want to go into that much debt.
So, they ask to borrow less and get denied by business lenders. Why? Because lenders offer business loans designed to fund major improvements.
If you need to borrow a small amount of money to get off the ground or pay for new tools, a personal loan is the best choice.
These loans can be as small as $500 and as large as a few thousand. And you’re allowed to borrow what you need as long as you get approved.
You Needed the Money Yesterday
Business lenders take a long time to approve applications. This is because they’re looking at the business as well as your personal finances. If you need money quickly, you can’t afford to wait for their approval.
When you apply for a small personal loan, the lender looks at your credit score and finances. They don’t look at your business or run business credit checks.
This means you’ll get approved faster and get the money you need without delay.
Why Use a Personal Loan for Business Expenses?
Using a personal loan for business expenses gives you more flexibility. You’re free to use the money as needed. And you can borrow small amounts and pay the loans off quickly.
This helps you bide time until your business starts making money month after month.
But there are other things you can do to improve your finances and free up cash. Learn more by checking out our latest posts. We’ll give you tips and tricks to improve your business and help you make money.
