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If you do not meet the strict rules and eligibility requirements set by banks for a business loan, a personal loan can help you get the funds you need to run your small business. Personal loans are usually unsecured, meaning they do not require collateral, so you are responsible for paying off the loan in monthly installments.
If the lender has no restrictions on using a personal loan for business purposes, you can use it to purchase equipment or office supplies, conduct a marketing campaign, or anything else your business needs.
Credible makes it easy compare rates for personal loans from several lenders.
Using a personal loan for small business
It might make sense to use personal loan for your small business if your needs are simple. For example, if you have a new business with no long credit history or want to make a quick loan decision, a personal loan may be the right choice for you.
Many entrepreneurs who started a new business or did side business during the pandemic may benefit from personal loans rather than business loans, because business loans usually require a long history of operations.
Personal loans are a good source of finance for smaller loan amounts… According to Experian, the average personal loan balance in 2020 was $ 16,458. By comparison, according to the Federal Reserve, in fiscal 2020, the average loan amount approved by the Small Business Administration was $ 533,075.
Many lenders prohibit borrowers from using personal business loans, but these partner lenders allow it.
Why you should use a personal loan for your business
As long as your lender does not place restrictions on the use of personal loan funds for your business, a personal loan can make sense for your business because it has many benefits.
- Fast financing – With strong credit, you can access your credit funds within from one to two working days… On the contrary, it may take a month or more before you access your funds from a Small Business Administration loan.
- Qualifications are based on you, not your business – If you have a good or excellent personal credit rating, it will be easier for you to take a personal loan. While business loan underwriters usually check your company’s earnings and business history, you are eligible for a personal loan based on your personal preference. credit history…
- No deposit required – Most business loans are secured by collateral, which is a personal asset, such as a home. On the other hand, personal loans are generally unsecured, which means you don’t have to post collateral to qualify for the loan. Your primary responsibility is to make payments on time.
- Flexibility – You can use a personal loan for a business for any reason, such as marketing expenses, stationery, inventory or any other purpose.
- Low rates – Interest rates on personal loans are usually lower than from other funding sources. For example, on credit cards, interest rates are much higher. According to the Federal Reserve, the average interest rate on personal loans was 9.58% in May 2021, while the average rate on accrued credit cards was 16.30%.
With such advantages, personal loans can be a great option for small business owners. Let Credible help you compare rates for personal loans from different creditors.
The risks of using a personal loan for your business
Personal loans are a fast and flexible way to pay for the financial needs of your business, including payroll, inventory and vendor expenses. But they have their drawbacks.
- Small loan amounts – Since personal loans are usually issued for smaller amounts, business loans may be the best option if you need a large amount of money.
- It is impossible to create a loan for your business – If you want to get a business loan in the future, a personal loan in your name will not help you improve the credit rating of your business. Moreover, a personal loan exposes your own credit to potential risks if you are late in payment or default on your loan.
- May Affect Your Personal Credit – If you already have a stable income and an excellent credit rating, a personal loan will have lower annual interest rates or annual interest rates. But for borrowers with bad or fair credit history, a personal loan may have a much higher annual interest rate, making it difficult to repay the loan.
- Mixing finance can cause headaches – When you use a personal loan for business, it is easy to mix personal and business finance, which can cause problems when filing your tax return. To avoid complications, keep a separate bank account for your business expenses and transactions.
- May limit future funding opportunities – Getting a large personal loan can prevent you from accessing funds for other purchases – such as a home or car loan – because lenders consider yours debt to income ratio (DTI) to determine your eligibility for additional points. Adding a large personal loan to finance your business can significantly increase your DTI.
Alternative financing options for small businesses
If a personal loan doesn’t make sense to you, consider taking advantage of other small business financing options.
Here are some alternative ways to get funding for your business.
Small business loans
Small business loans can help you buy new equipment, expand your reach, and fill shelves. Small business loans are usually available through regular banks, credit unions and online lenders. Be sure to have your business plan ready. Note that many lenders require the business to have a history of at least a year or two and you must be able to reflect revenue.
If you are unable to show the income and credit history of your business, consider getting a personal loan. With Credible, you can easily compare rates from different creditors.
Small Business Grants
Many government agencies offer grants to help you start or grow your business. The main advantage of grants is that you do not have to repay them, as is the case with loans. You may need to spend a fair amount of time researching the various grants that you are eligible to receive, but it is worth the extra effort to inject funds into your business for free. Start your research Small business Administration a website that provides many tools for finding federal grants.
Outside investors such as venture capital firms and business angels can help you start and grow your business. Many entrepreneurs benefit from the mentoring they receive from investors who have the knowledge, connections, and experience to achieve the highest levels of success.
Of course, investors are looking for financial rewards, and often they only invest in companies with a clear market advantage. In exchange for a start-up loan, they usually expect a partial ownership of your company.
Business credit card
Business credit cards – especially with an initial period of 0% annual interest rate – are a popular option for paying business expenses. In this case, the cards can act as an interest-free loan during the promotion period.
Typically, you will need good credit to be eligible for a business credit card, and these cards usually do not have high credit limits. However, a business credit card can help you finance your new venture interest-free. Just make sure you pay off the balance in full before the end of the promotion period, otherwise you will start accruing interest on your business purchases at the card’s regular rate.
SBA loans or SBA microloans can help you start or grow your business with lower interest rates and lower down payments. But the SBA doesn’t make small business loans — it guarantees them through the US Small Business Administration, the federal government’s agency.
The SBA guarantees a robust small business loan package to help business owners with varied needs. Just be aware that the application and approval process can be quite lengthy.
Many small businesses receive seed funding from crowdfunding sites. Successful crowdfunding campaigns can help you connect with customers and collect customer data.
Companies that offer a unique product or service are often the most successful. To get support and funding, you must be committed to multi-platform marketing. Please note that there are many people involved in crowdfunding, which can lead to unpredictable results. Experts advise to seek help from an experienced partner who foresees possible problems.