Personal loans usually have lower interest rates than credit cards. This is why many people use them to pay off credit card debt and emergency expenses or to keep their business startup running. However, some experts advise against using personal loans to fund your business. In this article, we discuss the pros and cons of personal loans and provide important information you should know before using a loan to fund your startup.
What Is A Personal Loan?
Personal loans are lendings from banks, credit unions and online lenders that allow you to pay back the full amount, with interest, in fixed installments, over a given period of time. Business startups find it hard to get business loans or investors because being new companies they lack a credit history. On the other hand, the founders are usually able to get personal loans based on their own finances and credit history. This is why personal loans have been used to fund many business startups.
Most lenders have no problem if you take out a personal loan for business purposes. However, it is better to disclose your intentions so that if they have a problem you can approach another lender that would be willing to fund your business. Most people can get a personal loan of up to $40,000 with an interest rate of between 5% to 36%.
Advantages Of Personal Loans
The main advantage of personal loans is that they are much easier to get than business loans, especially for startup companies. Lenders often base their decisions on the credit history and personal finances of the founder rather than the business itself which is why they are easier to get. Secondly, the monthly payments are fixed, which makes them easy to anticipate and budget for.
Additionally, personal loans generally have no limitations on what they can be used for hence the business owner can apply them to whichever area they need the funds for. Finally, for those with great credit ratings, personal loans can have very low interest rates as compared to business loans. One can get a personal loan with an interest rate of 5%. Business loans on the other hand generally have an interest rate of about 10%.
Disadvantages Of Personal Loans
The main disadvantage of personal loans is that one can borrow a relatively small amount in comparison to business loans. Most lenders can only allow you to borrow between $40,000 to $100,000. On the other hand, business loans can go up to millions of dollars.
Another disadvantage of personal loans is that you risk ruining your credit history if you default on the loan. On top of this, you could lose property such as your house if you used it to secure the loan. Interest on personal loans is also not tax-deductible unlike interest on business loans.
Alternatives To Personal Loans
If you decide not to get a personal loan there are other funding sources for you to consider. You could get a small business administration (SBA) loan, an online business loan, or even take out a small business credit card if you can use it responsibly.
For more tips on running startups read the rest of our blog. For example, if you need ideas on what kind of business startup to create see the best machine learning startups as well as the leading automotive startups in the world.