Backed by surveys from the Kauffman firm, joint research by Brock University in Ontario and Florida Atlantic University reveals that startups funded by personal loans don’t grow as much as those funded by business loans.
According to the research, a business loan funded startup will generate 4 times as much revenue as that with a personal loan.
The research goes ahead to compare survival rates for both businesses. Business borrowers have an edge over personal debt funded businesses, 19 percent more to be precise. On the other hand, businesses funded by personal loans have a slight edge on companies without any form of debt.
While personal loans may not be suitable for a business, there’re scenarios where it can be a viable option. For example, during the initial stages of a startup, qualifying for a business loan may be an uphill task because lenders want to see cashflow.
The Advantages
1. Personal Loan Application is Fast and Easy
As an entrepreneur, you may be in need of fast cash to fund various business activities. A personal nation 21 loans offers such fast access since you’ll need to provide less documentation. This includes personal information such as your Social Security number, income, date of birth and your address.
In addition, you’ll also have to provide a pay stub and bank statement. What’s more, the lender will want to see liquidity such as savings and personal assets, which they can use to recover their money in case you default.
If everything checks out, you’ll have the funds in a few days, although this will depend on the lender.
On the other hand, applying for a business loan requires tons of paperwork. The lender will want to see and analyze the entire financial structure on top of checking your personal credit. What’s more, they’ll also look at collateral and cashflow, factors that are absent in a personal loan application process.
Some lenders may want to know how long you’ve been in business not to mention your business credit score, annual and monthly revenues. This is only the tip of the iceberg. You’ll also have to produce a balance sheet, tax returns, bank account statements and a profit and loss statement.
For an entrepreneur in need of fast cash, acquiring and compiling these documents can be time-consuming.
2. Access Lumpsum Amounts
If you decide to take a business loan, you’ll have to deal with periodic withdrawals. This means you’ll not access huge amounts at one go.
If you want lump sum amounts for your business, you must provide various documents including a project budget, receipts and invoices. This will show the lender what you intend on doing with the money.
In contrast, you can access huge amounts with a personal loan without too many questions since the lender believes you’ll use the money for personal reasons.
The Cons
1. Mixing Personal and Business Finances is Risky
Not only to you but also to the business. Keep in mind, when you borrow this money, the loan amount will be against your name despite using it for business purposes. With such huge amounts on your name, lenders may shy away from extending any loan since they deem you as a risk.
Sometimes, things don’t go according to plan and the business may suffer from reduced revenues. This is a problem because you won’t have enough money to pay back the loan and your credit will be the first to suffer.
Remember, a single late or skipped payment can lower your credit score by up to 100 points. If you decide to offer a personal guarantee to a business loan, then any mishap will lead you down the same path.
2. Borrow More with a Business Loan
In most cases, businesses will require huge amounts of money to finance operations. This is why there’re business loans since they can offer such large amounts. With this money, you can expand your business operations, thus allowing it to grow much faster.
To be precise, you can borrow up to $1 million with a business loan. On the contrary, personal loans have a cap of $100,000. Note that these limits vary from one lender to another. In addition to the lender, your business will also determine the amount the money you can qualify for.
3. Build Your Business Credit Score
Again, when you take out a personal loan, the amount will be in your name and not in the business’s name. As such, you’ll only build your personal score and not that of the business.
While this may be good for your personal finances, your business may not be able to access larger funds in the future. This is because the business doesn’t have any credit history to enable it to apply for a loan.
To build a business credit score, you’ll need to take loans, credit cards and register credit accounts with the business’s name.
What You Must Consider when Applying for Personal Loan for Business
If you decide to take out a personal loan to fund your business, then it’s important to consider the terms and conditions laid out by the lender. While the rules of engagement will vary from one lender to another, you can cover the basics:
- The amount you intend on borrowing
- The repayment terms
- The interest rates and fees
- Minimum income and score
- Security, if needed
A business loan allows you to build a solid relationship with the lender. After the underwriter understands the business and its financial structure, subsequent loan applications become easy and you can reap maximum benefits.
In addition, a business loan suitable for entrepreneurs with an average income. On the other hand, a personal loan is more beneficial for those with a high income. Regardless of the option you choose, always ensure your business will benefit from the entire process in terms of credit and growth.
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