There are many times when shortcoming of available funding throws wrenches into the business goals and an entrepreneur needs to borrow some money to cover the hard costs of goods or services, employee wages, marketing and so on. Anyone who has ever tried or currently running a small business, knows very well that cash is one of the major priorities of every business to fulfill various business-related needs. All the recently mentioned costs are an integral part of any especially for those with a small percentage of profits. All these business costs are the reason why most of the business owners and entrepreneurs borrow money from financial institutions to fund their businesses, and sometimes they resort to personal loans in order to cover such business costs and expenses.
While getting a personal loan can help a small business get the necessary funds to fulfill business needs, personal loans do involve some risks as well for entrepreneurs. This article contains a few pros and cons of using personal loans for small businesses that every business owner and entrepreneur must know before applying for one.
Pros of using a personal loan for small business
Whether it is a new business or you have established one properly, it takes time to build a positive credit rating to get a business loan approved by a traditional lender. Many of them want you to show your business plan or other financial documents to make sure you can take on a business deb and pay it back as agreed. On another hand, you may not face such difficulties and other strict requirements when looking for a loan from an institution offering easy personal loans that can be used for business purchases and so on.
An individual or business owner with good credit ratings or strong references with the lender can easily get a loan without putting any securities or collateral. Such loans are known as unsecured loans. The majority of the financial institutions and money lenders usually offer secured loans that one can get after signing over business assets, personal property or other valuable things as collateral. Instead, personal loans usually are unsecured loans and don’t have any requirement of putting up property or collateral. That is the reason, a personal loan could be the best option for a small business owner to fulfill business costs and expenses.
Personal Loans come with Fewer Penalties
Business loans often come with strict terms and penalties that personal loans don’t. You may need to pay a business loan back as per the terms stated by the lenders. But for personal loan, the lender will allow you to pay off the loan amount with flexible terms and conditions that you can easily adjust according to your budget plan. However, one should check the loan use confines if any, to prevent problems in advance.
Cons of using a Personal loan for Small Business
Lending limits are one of the major drawbacks of personal loans when it comes to using them for small business funding. Individual lenders and financial institutions are not excited to approve loans for huge amounts unless they are offered collateral to make the loan secure. That is the reason, if you need a big sum of money for business funding, you shouldn’t consider personal loans for this purpose because you cannot get enough money to meet your business needs.
As it is mentioned above that personal loans come with flexible repayment terms, it could be a drawback for business owners if they need a loan of $50000 or higher. Because you are not sure about the success and future of your business, you may not have the capacity to repay the loan in the future. It could end you up with no money to pay the loan back that can have a bad impact on the personal credit rating of the borrower. In this situation, business loans can work well for a new or established small business as they are available with lower interest rates and an option to extend the repayment window up to 25 years.
No Business Credit History
When a business successfully gets a business loan and repay it back as per agreed terms, it helps the business build good credit rating and history. On another hand, personal loans used for business purposes do not help a small business build good credit history and strong relationships with the lender that can be beneficial in near future for getting a business loan of a big amount. That is the reason, personal loans are not considered suitable for business purposes.