Loans can be a lifeline for small businesses and managing payments is one of the most important tests for up-and-coming entrepreneurs. The financial market offers a variety of options and most businesses focus on business loans to get their company up and running. This is somewhat understandable, but it definitely isn’t the only way to go. A personal loan can also be used to finance business expenses and sometimes it’s a preferable way to do it.
What is it?
It’s pretty straightforward. Unlike a business loan, a personal loan is given to an individual. In the process of applying for one, only your personal income and credit are evaluated. This means that your credit card usage and overall financial behavior could be less than perfect. It’s usually a smaller amount and the lender doesn’t ask or checks how you’ll spend the money.
The benefits obviously have a downside as well. Mixing personal and business finances could damage both. Even if your business fails, you’re still going to have to return the loan because not doing so will reflect poorly on your personal credit score regardless of the state of your business.
When to do it?
When banks issue business loans, they check the overall state of your company. The check-up starts with revenue, but it often goes much deeper than that‒ a comprehensive business plan is also needed as well as established facilities and cash flow. New businesses don’t have any of this and sometimes there are a lot of expenses before the company is even open for business. In these cases, a personal loan might solve all your problems because it doesn’t require you to build a reputation before you apply for it.
Also, some banks are reluctant to issue small loans. The interest rates are too small as well, which means there’s not that much profit in it. Companies such as NSW Mortgage Group provide personal loans even for small amounts, designed to pay for unexpected bills or medical expenses. This works out well for small business owners because sometimes only a small financial injection is needed to get the business off the ground and let it rely on its own revenue.
Besides cash flow, most small businesses have a problem with collateral, which is holding them back from getting affordable loans. Collateral could be a property you’ve purchased using the loan. The lender can take possession of the property in case the debt payments stop. In margin trading, the securities on a brokerage account are used as collateral. Quite simply, with personal loans, there’s usually no need for collateral at all. The additional risk is covered by higher than average APR rates and by instituting additional fees (like the ones for signing and closing).
It’s important to find all the information about the additional fees before getting into borrowing money. These are usually a part of the contact, but most don’t bother to look up the details. There’s usually a loan approval fee, which is paid only once. Administration charges are much smaller, but they are paid each month. Often, there’s a closing fee as well and it’s usually the same amount as the approval. There are also charges every time you’re late with the payment, which you can avoid simply by being responsible. Some banks also charge if you decide to pay out the loan ahead of time.
Personal loans are designed for larger purchases or unexpected expenses, but because of the way they are set up and the way you can apply for them, they can be a perfect solution for small businesses as well.