Can You Use a Personal Loan to Start a Business? What You Should Do

Can you use a personal loan to start a business
Smart-Towkay

Let me know if any of these questions sound familiar. Can I use a personal loan to start my business? How do I use a personal loan to start a business? How do I get a personal loan to start a business?

Well, I am pretty sure they do. So, I will save you the stress of surfing the net endlessly for the best answers by going through them one after the other in this post.

But before I answer all of these questions, let’s first find out what exactly a personal loan is.

What is a Personal Loan?

A personal loan can be defined as a fixed amount of money you can borrow from banks with an agreement to pay it back over a specific period of time. Personal loans usually come with interest. When you are paying back the loan, you are to pay back the full amount, the interest, and any other applicable fees.

There are various payment methods. Sometimes you are even allowed to pay back the loan in installments. Personal loans are basically used for specific purchases. Purchases such as home improvements, medical bills, or debt consolidation.

Most personal loans range from $100 to $50,000. The payment periods are usually six to sixty months. These are available at banks, credit unions, payday lenders, title loan companies, or even private lenders.

Personal Loan to start a Business

Most personal loans don’t stop you from using the money for business costs.

Generally, making use of personal loans can come with various benefits, especially when you are just starting up a small business. They are easy to apply for, and the steps to follow are very convenient. One good benefit of applying for a personal loan is that you have a huge variety of lenders from which you can choose from.

Personal loans are not just granted by banks; they can also be given to you by traditional lenders, entities that borrow money, including your family and friends. This makes it easy for you to apply, and the availability of the various lenders provides you with options, which enables you to make better choices.

Meanwhile, there are a couple of other advantages of using a personal loan for your business finances; and disadvantages too. Whether you are using a personal loan to either start a business or pay your business finances, these advantages and disadvantages should be highly considered before deciding to apply for the loan.

Advantages of using a personal loan for your business

Some major advantages of using a personal loan for your business include the following:

  1. Applying  for a personal loan is fast and easy
  2. Applying and being able to qualify for a personal loan is easier than applying and qualifying for a business loan, (especially when your business is new)
  3. It is very easy to find a lender for a personal loan. It does not necessarily have to be a bank
  4. When applying for a personal loan, your credit history is taken into consideration, as your income and also your overall worthiness
  5. The interest rates for a personal loan are usually lower
  6. Your personal credit history would be more favorable to you than your business history

Disadvantages of using a personal loan for your business

Some major advantages of using a personal loan for your business include the following:

  1. Personal loans are usually small compared to business loans.
  2. If your business does not make enough money to support the repayments of the loan, it is your credit score would be affected
  3. If your business can not pay back the personal loan, you will have to pay back using your personal money. It does not matter if the business runs down, you are responsible for the entire loan amount
  4. Every time you apply for a personal loan make it difficult to get another one
  5. Many of these lenders use a debt-to-income ratio. This simply means the more debt you have
  6. Applying for a business loan may limit the ability you have to get a loan for a car or house later in the future

How big of a loan do I take out to start up a business?

If you are planning on starting up a business, the amount of loan you will need depends on the type of business you want to start and also its size.

The start-up loans that are available from banks usually come in a range of $9,000 to $20,000. You could also be given as little as $500 or as much as $700,00. In order for you to get a large amount of loan, you will need to have a large personal income before the loan can be approved. The banks do this just to ensure that you are able to pay them back.

What kind of loan do I get to start up a business?

As a business owner or an entrepreneur, if you are planning on starting up a new business, the loan you decide to acquire is a personal choice of yours.

If you are an entrepreneur and a first-timer in the business world, it is advisable to get a personal loan, depending on your circumstances. If you are able to get a personal loan from your family or friends, you can decide to take a big loan. But if you are applying for a loan at a bank, it is advisable to go for a personal loan and not a business loan.

However, if you are already a business owner and you’re doing quite well, you can easily get a business loan.

Can You Use a Personal Loan To Start Up a Business?

Before you decide to start up a business, you need to take into consideration the type and size of the business. It is very possible to use a personal loan to start up a business as long as you have adequate knowledge about the advantages and disadvantages of it.

If you are starting a small business, it is advisable to apply for a personal loan, but if you have a large business in mind, a personal loan would not be favorable. This is because personal loans are usually small. They are enough to start a business, but the amount given is quite limited, compared to a business loan.

How can I start my own business with no money?

With the help and availability of new technology, there are various businesses you can start with no money.

If you have an idea about starting a business but do not have the capital or other form of funding, it is advisable for you to start the business using eCommerce. With the help of eCommerce, there are various stores online that start at $0.

You can easily design a website, create a brand name, add some products, and begin to sell, yes, it is that easy. All you need to do is have adequate knowledge about e-commerce, and you are good to go. There are various techniques for selling without having to own the product or have it physically, e.g., dropshipping. You can also act as a middleman, and you can even sell services online, all you really need to do is carry out research about ecommerce.

Moreover, if your plan is to start a business on-site, you will need capital. You can easily approach close friends and family about this, or you can find an investor.

What is a typical small business loan amount?

The average loan for a small business depends on the lender and the types of loans they offer.  According to research, latest data from the Federal Reserve, the average loan amount for a small business is $663,00.

However, the average amount from alternative lenders for a small business loan is $80,000. Small business loans, can also range from $13,000 to $1.2 million.

Getting a Personal Loan to start a Business

There are various steps you need to consider taking in order for you to take out a personal loan. Some of them include;

  1. Check your credit
  2. Take your options into consideration
  3. Select the type of loan you need
  4. Search for different lenders and choose the most appropriate one
  5. Apply for the type of loan you want
  6. Make provision for the necessary documentation
  7. Once the loan gets approved, be prepared to start making payments.

These are the necessary steps you need to follow in order to get a personal loan for the startup of a business.

How much interest do you pay on a business loan?

As a business owner or an entrepreneur, when you are about to apply for a loan, you need to take the interest rate the lender is adding to the loan. If the average interest is large, and you are comfortable with it then you can go ahead, but if it is not suitable for you, then you need to reconsider.

However, the interest rate on the loans also depends on the lender, the types of loans you want, and their size. This is because each loan type has different types of interest rates.

Conclusion

With the advantages of personal loans, entrepreneurs and various business owners have been able to start up businesses. Although there are downsides when applying for personal loans, (which is quite discouraging), the benefits are also helpful.

Through personal loans, a lot of people have been able to establish infant enterprises, hence financially their needs and expenses have been covered.

References

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