It is not a secret that business is a profit-generating activity that requires financing to get started. Funds are necessary to secure workspace, hire employees, cover operational expenses, purchase equipment, and promote the business. When thinking about how to finance a business purchase, getting a loan comes to mind. Therefore, it is essential to study loan type differences and evaluate which form of business loaning is more advantageous.
Difficulties When Inquiring Loan for Business Startup
To finance their startup, entrepreneurs may consider business credit cards, business line of credit, certain SBA loans, and any other form of a secured traditional loan. However, if the going-to-be-established business does not have a year or more of history and recorded revenue, its owner has a low credit score or bad credit, the mentioned secured loans are nearly impossible to obtain. In this respect, the only option left is the personal loan to start a business.
What Are the Differences Between Business Loans and Personal Loans for Business?
A Business loan is typically secured by a personal guarantee and collateral. The reason behind this is that any business carries the risk of failure. This makes lenders skeptical and prompts them to cross-collateralize the loan against the borrower’s other assets. They also want to make sure that the borrower will repay the debt by examining the credit history. Personal loans for businesses, on the other hand, do not require collateral. They are unsecured loan types and are not intended to be used for getting large funds. As a result, prerequisites are easier to meet. However, a personal guarantee and a good credit score are still required.
- Flexibility of Loan Usage
Lenders of business loans want to be sure that approved funds are utilized for business purposes only. On the other hand, borrowers of personal loans for business have more leeway in how they use funds. If borrowers of personal loans for business follow the repayment plan, most lenders do not get involved in loan usage.
- The Speed of the Process
The process of getting a business loan takes longer than applying for a personal loan. It requires paperwork, guarantees, collaterals and a long chain of approvals that take weeks. On the contrary, getting a personal loan to start a business is quick and handy. It does not require collateral nor an intensive credit history check. The process is much more available online than in the case of traditional loans. This increases the possibility of receiving fast feedback from the side of the lenders.
- Loan Limits
The personal loan maximum is smaller in comparison with business loans. It ranges from $1,000 to $50,000 and generally lasts for 12-60 months. Business loans, on the contrary, have much higher limits reaching $ 500,000. In this respect, personal loans for business are more convenient to start and finance a small business. They respond to the question of how to get a small business loan. However, the lower the amount, the higher the interest rate could be.
- Business Credibility
Getting a personal loan will not help build a BUSINESS CREDIT HISTORY. Business loans and their scores influence business expansion plans and future borrowing eligibility. For example, lenders evaluate the business credit score rather than the personal credit score to determine their willingness to extend funding to a business, the amount of the funding, repayment terms, and interest rates. Results will also influence the cooperation level with other companies. Positive business credit scores promote trust and provide more favorable payment terms when dealing with vendors and suppliers.
- Interest Rates
Loans will have different interest rates depending on the borrower’s credit score. In some cases, when the personal credit score is high, obtaining a personal loan to finance a business would be more advantageous even without a business revenue record.
What Factors to Consider When Obtaining a Personal Loan for a Business Startup?
- The Credit Score
There is a plethora of online lenders for personal loans. To narrow the search and save time, borrowers should be aware of their credit score. Some lenders work only with borrowers that have excellent credit scores. Others work with those who have subprime or bad credit scores.
- The Overall Cost of the Loan
Borrowers should look at the annual percentage rate of the loan rather than the interest rate alone. This is critical because the annual percentage rate helps appreciate the total loan cost which includes application fees, origination fees, prepayment penalties, and late fees. With complete understanding, borrowers can compare available personal loans, negotiate fees, and reach the most convenient option.
- The Liability for the Loan
Although the personal loan for business does not require collateral, the borrower should personally guarantee it. Borrowers usually sign a contract through which they acknowledge their responsibility for the debt. In case of repayment delay, the lender may take the borrower to court and employ debt collection tactics. In this regard, it is essential to check the liability level required by the lender.
- The Loan is Eventually a Debt
Borrowers should not forget the fact that they are starting the business with debt. Higher rates and larger debts lower the profit percentage. Therefore, they must have a clear understanding of their business plan, potential risk, and their ability to pay the debt back.
- Mixing Between Personal and Business Expenses
Borrowers should manage the loan with caution because business funds get influenced by taxation and business growth. Therefore, it is recommended not to mix the personal expenses with those of the business.
How to Qualify and Get a Personal Loan for Small Business?
If you wish to learn how to get loan for small business, then do the following:
- Research and shortlist lenders based on your credit score and the loan amount.
- Review the requirements of the lenders carefully. Some lenders will not allow personal loan funds to be used for business purposes.
- Compare the annual percentage rate and monthly payments to be aware of the entire loan cost. Never forget to check pre-payment and late payment penalties.
- Prepare your loan documents. Usually, the documents required to apply for a loan are the driving license or the official ID, bank account details, employment verification or proof of monthly income, credit card, and address.
- Complete the online application form, add your electronic signature, and submit your application.
- After applying, the only thing left is to wait for a response. The response will either be a loan approval or a request for additional supporting documents. Sometimes you get the approval in a matter of hours.