Can I use personal loan for business purposes?

There is a big world of loan products out there but chances are when it comes to financing your business, you have only focused on one category that is business loans. Most of the people use business loan because they are still unknown from the benefits of the perosnal loan. If you are looking to expand your business, then why shouldn’t you look for a personal loan? The products, criteria, lender and payment structures of business loans are specially designed with business owners in mind. They were made to fit.

But you don’t want to take it for granted that business loans are the only loan products that can help your company succeed. It is possible to find funding that fulfills your particular needs where a business loan might fail, or only come through halfway.

For example, have you ever thought about using a personal loan to finance your business instead? What’s the big difference? Before you can decide whether one or the other works better for you, we’ll have to take a closer look at how they function.

Personal Loans 

Personal loans are naturally for personal matters. You might be taking one out to pay for an appliance, home repairs, or a vacation or maybe you are financing an operation or a wedding, or consolidating credit. Such personal loan involves that bank or lender giving money to you, not your business.

The differences are quite substantial: personal loans typically come in smaller amounts, don’t require collateral, and focus on the individual rather than the business. This can work in your favor, or very much not. If you’ve got great credit, then you won’t have as much trouble snagging that personal loan, even if you’re planning on starting a business but haven’t done a whit of research yet. In case you are looking for a business loan without any business history behind you, you might be facing a tough time. Plus, you can hide behind less-than-fantastic credit a bit if your revenue, time in business, and overall financials show strength—but underwriting for a personal loan doesn’t take any of that into account.

Business Loans

Owners are looking forward to getting some extra cash whether because they needed to fix a problem, grow in a particular direction, or just have some capital cushion. No surprises there. Since the 2008 financial crisis, Big banks tightened their belts and stopped passing credit around as freely. Leaving most small business owners out in the cold. Lending(alternative one) changed the game by recognizing that small business owners with less-than-excellent credit or revenue were being underserved, and began offering smaller, faster, more expensive loan options.

That said, business loans still require quite a bit of time and effort to secure. You are looking at faster qualification periods and less legwork, but still nothing insubstantial if you are comfortable with smaller or shorter-term goals.

The focus is on your business—and that’s why the process is so involved in the business loan. Businesses have so many moving parts, and your lender, whether they’re a bank or a startup, will want to feel pretty confident that you’ll be able to pay them back.

Personal loan for your small business?

If your revenue or other financials don’t meet the minimums for the business lender. If you do not have the collateral for a business loan if you’ll be putting that cash into an unorthodox use, or even if you’re in a typically risky or undesirable industry. If there is anything in your loan application that could stand out in a negative way, a personal loan might be able to step up to the challenge where a business loan wouldn’t even try.

Personal loans provide excellent credit and personal financials, however—so there’s no escaping those core standards. What you have to do is to play to your strengths and think: how would a lender appraise me as the most likely to pay a loan back on time?

Two more quick aspects of personal loans to be aware of:

  1. Mixing financials. If you are going for a personal loan and using it for your business, you’re intermingling you are business and personal financials. It is not an issue for an early-stage business, but you’ll want to keep careful track of the two separately—and start building some business credit as soon as you can.
  2. Closing costs. Some personal loans could come with closing costs. If you apply for a Rs. 5,000 loan and there’s a Rs. 250 closing fee, you’ll only see Rs. 4,750 in your account but will pay interest on the original Rs. 5,000. That’s standard practice, so don’t let it take you by surprise.

If you’re a young business and can’t qualify for a business loan, outside of a personal loan, your financing options include business credit cards, VC or angel funding, grants, and more. Do your research and decide which is best (and most plausible) for you. You’ve got options, but it’s all about finding the right option

By | 2017-11-02T12:33:55+00:00 November 2nd, 2017|Personal Loan|0 Comments

About the Author:

Pulkit Jain is the founder of LegalRaasta – India's top portal for registration, trademark, return filing and loans. Pulkit is a veteran CA with over 10+ of experience.

Leave A Comment