Finding financing for business tends to be relatively easy, as long as it has been active for enough time to convince creditors that you know what you’re doing. However, getting the money needed to get a company off the ground can be considerably more difficult, especially if you have no business experience. This pushes many entrepreneurs to sign expensive business loan agreements that end up putting a lot of financial stress on a company that is in its infancy.
This having been said, there are always other options when it comes to securing the funds that you need to start a business. The increase in popularity of personal loans has turned them into a great tool for entrepreneurs who have no business experience but want to start a company with relatively few risks. Even with these loans, there are some things that you must consider, from the amount of money that you can borrow to what you can do with the funds.
Personal loans 101 – What are they and how do they work
Personal loans are, as the name implies, completely personal. This means that the banks will allow you to borrow the money and use it however you see fit. There are no restrictions of any kind, which is great when considering the fact that unlike with business loans or payday loans, you won’t have to convince the lenders that your company will succeed and the money will be put to good use.
Generally speaking, personal loans are not secured, which means that you won’t have to put up any collateral to get the money. This not only minimizes the risks in case your company fails to get off the ground but also helps skip a few tedious steps in the request submission and approval process.
The main thing that you must keep in mind when it comes to personal loans is the fact that the creditors will not allow you to borrow as much money as what you would get through a business loan. However, if your business idea does not require a large initial investment, or if you also use other personal funds to finance it, it should be more than enough to get things started.
Who can qualify for a personal loan to use for business purposes?
There are no restrictions on what you can do with the money from a personal loan. The creditors will not be interested in how you intend to use what you borrow. They only want to make sure that you will return the money. In other words, you have to have a good credit score.
This means that you shouldn’t have a history of not paying your debt or use a lot of credit. As a rule of thumb, you should do your best to consolidate your debt and to pay off your credit cards before applying for a personal loan. Doing this will increase your chances of getting lower interest rates and better overall terms.
As mentioned above, personal loans are usually unsecured, which means that you will not have to offer any collateral. However, some lenders may ask you for it if you want to borrow a very large amount of money.
Most banks and private lenders will require you to submit the following:
- Up to date bank statements;
- W-2 or pay stubs;
- Tax return information;
- Personal ID and address information;
Should you use a personal loan for business?
Using a personal loan to get your business going is a great way to secure funding if the terms offered by the banks, for a business loan, aren’t good enough. The fact that these loans are unsecured makes them great if you are not sure if the company will succeed or not. This having been said, there are also limitations that you have to take into consideration.
First of all, you won’t be able to get as much money with a personal loan as you would through a business one. The fact that personal loans are unsecured means that the lenders will impose certain limits on how much money you can borrow. While you may be able to ask for more money, there is a chance that you will be required to put up collateral.
Your credit score can also become an issue. If you take out a personal loan and the company fails to get off the ground, you may be left with a large debt and no source of income.
Generally speaking, you should only use a personal loan for business purposes if you are sure that the money won’t be wasted. Furthermore, do not borrow more than you need. Establish the minimum amount of money that you need to borrow and work with it. This way, if anything happens, you will be able to do at least a little damage control.
Personal loans are great ways to get the funds that you need for your business, however, you should only take this course of action if you think things through. Lenders may not require that you present them with your business plan or company-related details, but you should still ensure that you know what you’re doing.