Starting a small business is not a small step by any means. It requires significant capital to get things in order and start business operations. Unfortunately, most people who start a small business often do not have the required funds.
Therefore, they seek external financial aid in the form of personal loans or small business loans. These two methods of financing a small business are among the popular ones. However, a personal loan is less complex and more accessible than a business loan. Read on to learn more about using a personal loan to start a small business.
What Is A Personal Loan?
A personal loan is a credit instrument under the unsecured loan category. It is a go-to option for people who want to fund big expenses and repay the borrowed amount within a given time frame. There are no restrictions imposed on how the funds will be used in case of an easy personal loan.
These loans are also an excellent alternative to credit card loans which charge a much higher interest rate. It is important to note that the interest rates can vary based on the applicant’s credit score. One of the best advantages of a personal loan is that it doesn’t require collateral security.
Can Personal Loan Be Used For Business Expenses?
Most people are curious whether they can use personal loans for managing business expenses. The short answer to this common question is ‘Yes’. Since there are no restrictions imposed on the fund’s usage, it can be leveraged to manage business expenses.
However, some personal loan products are designed to meet specific needs. Therefore, one should check the terms and conditions of using the fund amount while opting for a personal loan.
Things to consider when using a personal loan for business
Here are some of the most important factors to be mindful of while using a personal loan for business.
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Interest rate
The interest rate roughly translates into the cost of borrowing. Therefore, while taking a loan to manage business expenses, it is essential to check the interest rate. Always compare the interest rate offered by different lending institutions before opting for the best interest rate. The lowest personal loan rates will reduce the cost of borrowing and make it more feasible to fund the business.
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Amount required
The total amount needed to manage your business expenses is the first and most important consideration to keep in mind. It makes sense to opt for a personal loan when the amount required is not huge.
There is an upper limit to the total loan amount one can get using a personal loan. It can vary based on the applicant’s profile and the policies of lending institutions.
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Duration and repayment of the loan
If you are facing a temporary cash shortage to manage short-term business expenses, a loan can be a great solution. It is quick and easy to get. For short-term borrowing purposes, you can opt for a loan to manage expenses.
Knowing your repayment capacity before taking a loan is also essential. It is prudent to opt for an extended repayment duration if you are unsure about the repayment capacity.
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Processing time
How quickly do you need the money? If the requirement is instant, easy loans are a great option. It can be disbursed within 24 to 48 hours if the applicant has all the required documents and meets the minimum eligibility criteria.
However, small business loans have a complex documentation process, and a lot of due diligence is also involved. As a result, the processing time is much higher than instant personal loans.
Advantages Of Personal Loan For Business
There are numerous advantages of using loans for managing business operations. Some of the most popular ones are listed below.
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No Business Documentation Is Required
Taking a loan to raise funds for a small business is smart since the documentation requirements are minimal. You don’t have to submit any business-related documents otherwise needed for small business loans. Therefore, it can save time when funds are needed urgently.
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No Collateral Requirements
Most business loans demand some collateral to process the loan. If the business is new and small, it can be challenging to pledge collateral. A majority of small businesses are bootstrapped and don’t have additional assets to deposit as collateral.
Final Words
Getting a loan to start and operate a small business can be a prudent choice if the amount needed is not huge.
Since personal loans are unsecured, there is no need for any collateral. It is vital to check and compare different personal loan products to find the lowest personal loan rates.
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