One of the most common challenges business owners run into is business funding. Depending on what your business is, it could cost thousands or tens of thousands to get started or expand, especially if you need expensive equipment.
Assuming you don’t have that kind of money in a savings account, where can you turn to get it? The first option most people think of is a small business loan, but this type of loan can actually be difficult to obtain. If you are in a good financial situation, it may be better to use a personal loan for business purposes.
You may have heard of entrepreneurs using personal loans for business. Isn’t that a huge risk taking out a personal loan for business?
From why business loans aren’t always the best idea (or even a possibility) to how a personal loan could work for your business, this guide to business funding will have everything you need to know.
What Does It Take to Get a Business Loan?
If you want to get a business loan, the lender will demand to see your business’s history and finances. If you’re a startup, then you have a problem. Few lenders want to take on the risk of loaning money to a startup with a high probability of failure.
But let’s just say that you do have an existing business with a reasonable cash flow history.
Even if your business has been making money, it could still be far from meeting a lender’s requirements. Look at Bank of America as an example. It offers unsecured business loans, but only to businesses that have been around for at least 2 years and have at least $100,000 in annual revenue. But that is bare minimum for a small unsecured business loan.
You need a substantial amount of documentation to get a business loan. The lender will want to see both your personal tax returns and your business tax returns for the last two to three years. You’ll also need to show them your balance sheets, business plan, cash flow statements, income statements and much more. If you can’t produce the necessary documents, getting a business loan will be extremely difficult.
And if you need to get money quickly for your business, then a business loan isn’t the way to go. Lenders are thorough when they process applications, because they want to make sure that you’re likely to pay back what you borrow. With the proper documentation, It could be months before you get the money from your business loan, and that’s assuming you’re approved. You could wait that long, only to get denied by the lender.
Advantages of Getting a Personal Loan for Business
The most significant difference between getting a business loan and getting a personal loan for business is that the personal loan will rely entirely on you. You don’t need to worry if your business has no credit score and isn’t making any money yet, because the lender will only check your credit score and your income.
The reality is securing a traditional business loan through a bank can be extremely challenging for startups and small businesses without a proven track record and solid revenues. The good news is a personal loan could be an excellent way to fund your business. – Marco Carbajo
The documentation requirements are much simpler with a personal loan. You’ll likely need to show the lender your driver’s license, provide your Social Security number, verify your address with a utility bill and show proof of your income. In many cases, you may not need to verify income at all. That’s far less than you need for a business loan, and personal loans also process faster. The loan could be funded in just a few days or weeks at most.
Risks with Personal Loans for Business
Before you apply for a personal loan, it’s important to understand the risks.
Personal loans have lower maximum amounts than business loans. The maximum amount will always depend on the lender, but business loans can be much larger. This will only come into play if you need to borrow a significant amount of money, as there are plenty of lenders offering personal loans in the $50,000 to $100,000 range, and some will go even higher.
Using a personal loan for your business can mix your personal and business finances if you’re not careful. It’s important to keep these separate for your record keeping and especially for tax purposes.
When you make your personal loan payments, it will be good for your personal credit score, but it won’t have any impact on your business credit score like a business loan would. You’ll want to make sure you find another way to build that business credit.
As with any personal loan, YOU are solely responsible for pay back of the loan. If you default on your loans or file for bankruptcy, the implications are personal, not business.
If you are considering using personal loans for business, it is ideal that you exhaust unsecured loans (that is, loans not collateralized by your personal possessions) before you put your possessions at risk. A new business owner using a home equity line of credit to start his business is betting on his home that his business will succeed.
Applying for a Personal Loan
When you apply for a personal loan, the most important factors that the lender will consider are your credit score and your income. With both: the higher, the better. If you can only have one, let your credit score be as high as possible.
Your credit score will determine the interest rate of your loan. A higher score will secure you a lower interest rate and save you money over the loan’s term. There are many credit monitoring services that allow you to check your credit score with at least one of the credit reporting agencies. You’re also able to request a free credit report every year from each of those agencies.
Credit scores can be anywhere from 300 to 850, and to get a personal loan at a reasonable interest rate, you should have a score of at least 660. Most lenders consider 720 and up to be excellent, and having a credit score in that range can secure you the best rate.
Your income will often determine how much you can borrow. The lender will compare your income with potential loan payments to see how much you can afford. You should make at least $25,000 per year, although this doesn’t need to be from a job. It could be from self-employment, disability payments, Social Security, rental property income or any other sources.
As a general rule, income generated from a company’s payroll (as opposed to self-employment income) is always easiest to secure personal loans.
If you don’t have a high credit score, consider improving it before you apply for your personal loan. Payment history and credit utilization are the two most significant factors used in calculating your credit score. If you focus on paying all your bills on or before the due date, especially your credit card bills, and staying below 50 percent in credit utilization, you can improve your score.
Building Your Business Credit
A business credit card is an excellent way to build your business credit, and it can also be a good funding option.
It’s much easier to get a business credit card than a loan, and if you use it and pay the bill off, your business credit score will improve. There are several business credit cards that offer 0% introductory interest rates (APRs). These periods typically range from 6 to 21 months. If you only require short-term financing, a 0% APR business credit card works well and you could avoid paying any interest.
Business credit cards are also helpful because they can earn either cashback or rewards on all your purchases. To take advantage of this, you can put as many purchases as possible on your business credit card, and then use your personal loan to pay the card off. You’re still using your personal loan for business funding, you’re just getting a return on your spending first through the credit card. And by paying off the credit card balance in full, you’ll never pay interest.
Finding Your Business Funding
There are plenty of ways to fund your business available. Your best bet is to research all your options to find the one that’s the right fit for your business. If your business is already successful, that may be a business loan. If you’re just starting, a personal loan is likely the superior choice.