Getting approval for funds is almost impossible for a startup business, especially when there is no physical location or office is available. However, personal loans can be an option as they are available to individuals and there is no need for collateral.
Moreover, personal loan approvals are influenced by credit report and scores. Although you have to fulfill the eligibility criterion to get your funding however, you are not required to come up with a business plan as it is must with a business loan.
Using personal loan as business finance will be helpful?
It depends on case to case, however, there are some points to consider before you choose between a personal loan or a business loan. There is a difference in approval process between a business and personal finance. Each lending institute implements extensive but custom measures to determine the eligibility of a person.
Go for personal Loan:
- If you have a good credit score
- Rate offered is very good as compared to business loan
- There is no physical business asset to present as collateral for business loan
- Have a good income to bear burden
Go for business loan:
- If you don’t want to use your personal credit against your business
- Have an asset to present as a collateral for business loan
- You are using that business as primary source of money
- Personal credit score is not good
Can we use personal loan to setup a small business?
Yes! Off course you can use a personal loan for business needs.
Personal loan are easy to get, and there is no need to provide collateral with a personal loan than with a business loan. Moreover, personal loan offer flexibility of spending including business needs. Here are some common questions which can arise while looking to finance your startup.
How to spend a personal loan effectively to setup small business
When you get the amount in hand, plan-up to spend the loan effectively so that you can get most from limited resources.
- Efficiency is the first thing one should worry for. Try to plan before each purchase so that you can figure out any ways to save some money on each time
- You can consider USED ITEMS to save some money. Some of the old machines last longer than current newer productions. Moreover, some machines require fewer repairs to keep up for decades.
- Using Wholesale Discounts can also be helpful to save money on buying inventory. If there is any such option available in your business model then you must consider that but you must do a cost to benefit analysis.
- Consider an investment for Marketing Efforts because you already have some products and you need to sell those items. For that purpose you can hire a consultant or can also DIY that if possible.
Benefits and drawbacks for using personal loan to establish small business
- Easy to Approve: Personal loans are approved quickly with simple process, while business loan takes longer and have little complex requirements
- Quick Funding: Typically, personal loans are funded more quickly as compared to business loans. Personal loans usually get transferred within a week after approval, while business loans may takes few weeks or even months.
- Lower Rates: If you have good credit score, you will get lower rates with personal loan. However, business loan will be costly if your business doesn’t have a good credit.
- Repayment Terms: Personal loan repayment plan usually based on monthly payments, however, business financing usually require weekly repayments.
- Lower Amounts: Personal loans are typically unsecured therefore you can only get small amount with this option. However, business loans have collaterals behind and you can get millions in term of financing.
- Personal Credit Risk: If your business does not meet the expected results you are may be risking your personal credit. Because you have to repay the loan amount in any case even if you decide to close your business.
- No Consultancy: Most of business loan providers offer experts and tools to help you grow your business. While on the other side the personal financing do not offer such thing and you have to do everything at your own.
A number of benefits are available for using personal loans as a source of business financing, however, it all depends on a specific situation. Always consider all the factors before making decision and to select any one option from the available list.