Starting even a small business is a tough row to hoe. New entrepreneurs need meticulous planning, enough time, and liquid money to meet unforeseen situations. However, they often find themselves short on cash. Fortunately, they have multiple funding options, out of which seeking a personal loan seems a wise and convenient decision.
Although it can be tempting for aspiring entrepreneurs to take out a personal loan for their small business, it is always good to understand all the potential risks and aspects.
Personal Loans – An Overview
Personal loans are targeted at individuals who can use them to cover the cost of anything that’s critical to their personal circumstances, such as education, home renovation, wedding, emergency, etc. Borrowers get the flexibility of using the money for any purpose but they might have to explain the plan for using the amount when they apply for the loan. Personal loans carry a lower interest rate than credit cards but the final rate can vary according to the credit score. A higher credit score can get you a lower interest rate and more favourable repayment terms.
Raising a personal loan for self employed or startup is dependent on several factors that must be considered meticulously by borrowers.
Should I Take Out a Loan to Start a Business- Factors to Consider
If you are planning to take a personal loan for your business, make sure to look into the following aspects:
Requirement of Loan Amount
If you don’t need a huge amount, opt for a small business startup loan as the process for applying for it is seamless and straightforward. Moreover, a particular personal loan doesn’t involve the lengthy documentation process that most business loans require.
Liquidity of the Business
Another factor you must consider before applying for a personal loan for starting a business is liquidity. If you are educated enough and familiar with the right application process, you can leverage this debt instrument to kickstart your journey as an entrepreneur. In case you are not aware of whether your business is liquid or not, apply for a personal loan and use low-interest-bearing as a safety net.
Expected Repayment Time
If your business is facing a temporary shortfall in money, then also a personal loan is recommended. If you can repay the amount within the given time, then go for a personal loan.
Although business loans take care of such requirements, personal loans are easier and hassle-free to get.
Amount Invested in the Business
You have various options to fund your business but the most important thing is to keep track of the money you have invested. Even if you are not taking a loan, make sure you have proper records regarding the flow of money to keep things smoother in the future.
Collateral
Another advantage of a personal loan is that it is unsecured which is not the case with business loans. So, if you don’t have collateral to provide as security, personal loans are a good option.
Can I Use a Personal Loan for Business Expenses?
Now that we have answered the common question, “Can you use a personal loan to start a business?”, it’s time to answer, if you can use this loan to meet business expenses. The simple answer is yes, you can cover your business expenses with a personal loan. Once your loan application gets approved, it’s your choice to use it any way you want, be it for inventory or to pay rent. However, in such a situation, make sure that you take out the loan with the lowest interest rate.
Conclusion
For a startup, both business and personal loans make sense. The factors that matter the most are the money you need, the interest rate, and how much ready you are to put your personal credit on the line. Also, you must be careful while reading the terms and conditions of the loan. In case of any confusion, clear the doubts with the lender and invest sufficient time in planning the budget of your business.
Author Bio: Tanvi Kaushik specializes in Content Marketing and works with the Digital Team at KreditBee – India’s fastest personal loan platform where self-employed and salaried professionals can easily avail of personal loans in just a few minutes when in need of quick funds. Tanvi writes to-the-point articles on personal finance and budgeting which are truly appreciated by her readers. She is committed to making money matters easy to understand even for the layman. Her commitment to her work doesn’t stop her from pursuing her hobbies of hiking, trekking and going on adventurous trips.