Should (or Can) I Use a Personal Loan to Fund My Business?

personal loan

If you are a small business owner you may have discovered, as so many business owners do, that the quest for operating capital is a never-ending one.

There are several ways to acquire money for necessary purchases, for expansion, or just for an emergency bailout, and one of the most common ways is to take out a loan.

Finding the best loan for your needs can be a task in and of itself. Researching your options is an absolute must, and a good loan-comparison site such as this can help you weed out the bad players in the industry and land one that works for you.

Before taking out any kind of loan, you need to have objective information about the lender – not just the interest rates (and other fees) and terms, but also the experiences of other customers who have used that lender.

There are many factors besides interest rate to consider when you are contemplating borrowing money.

But perhaps you are mulling over a more fundamental question that has to do with the type of loan.

Maybe you are wondering if you can, or should, use a personal loan rather than a business loan for your company.

The answer to this question is dependent upon many variables, including the size and age of your firm, your goals for the business, and where you live.

Laws and regulations may vary by country and by region, state or province. But here are a few points to consider.

A personal loan might work…

Most of us can remember a time, not that long ago, when getting extra cash for your business involved little more than giving your favorite loan officer a call, then showing up at the bank in a day or two to sign the papers.

Unfortunately, that all changed with the 2008 financial crisis. The banks got pretty badly burned, even if it was their own doing, and started looking very carefully at loan applications and the applicants themselves.

What once took a phone call and 48 hours suddenly involved a deep search into prospective borrowers’ business and personal finances, and actually getting the needed cash could take weeks.

And for small businesses, even that process usually turned into an exercise in frustration. Small business owners needed an alternative source for working capital, and many have turned to personal loans to fill the void.

For the small business owner – particularly the owner of a new business – whose cash requirements are relatively modest, and whose credit score is good, a personal loan might be exactly what is needed.

Smaller businesses typically lack the assets required to secure a business loan, but personal loans focus upon the borrower’s creditworthiness and personal financials, rather than his or her tangible assets.

In addition, the justification requirements for taking out a personal loan are inherently less stringent than the requirements for taking out a business loan.

And finally, the time it takes to review the application and disburse the cash is typically less than for a business loan.

If you need the cash in a hurry, a personal loan offers a distinct advantage.

…and then again, a personal loan might not be the answer.

Especially in the case of a small start-up business, it is easy to see how using personal credit to get going would be tempting to the owner, but there are a few things that warrant serious consideration before leveraging your personal credit to benefit your business.

For one thing, even if you can get the personal loans you need, doing so won’t serve to build your business’ creditworthiness.

As the business grows and your credit requirements grow along with it, you could find yourself with a great credit score, but you could also find your business with a modest or even nonexistent credit history, rendering the business incapable of growing as you would like.

In a worst-case scenario, wherein the business has to either grow or wither, you could see it moving toward the latter alternative.

In addition, you may find that as you rely upon personal loans more frequently, your personal credit score actually begins to fall. The lack of clear distinction between your business and personal finances can also cause your personal credit score to be lowered.

If you have been using your personal credit extensively to fund your business, your personal finances could appear to your bankers to be less-than-ideally managed, perhaps carrying a debt burden that, while not exorbitant for a business, would appear excessive for an individual.

At the very least, you need to look beyond your business’ immediate needs, and ensure that the methods you use to meet those needs don’t impair the business’ ability to function, thrive, and grow in the future.

Again, keep in mind that “your mileage may vary,” as the saying goes, depending upon where you live. Be aware of national and local laws affecting you and your business, and never make a major financial decision for your company without consulting with a qualified advisor.


1 thought on “Should (or Can) I Use a Personal Loan to Fund My Business?”

  1. Even thus i did not quite understand where the post is heading to, but taking personal loans must be done with caution, and figuring out ways to recover the loan later

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