Sometimes it can be difficult for a small business to procure funding. Especially if you are relatively new, don't have an excess of collateral and aren't bringing in the annual revenue numbers that banks like to see, you could be facing some major roadblocks to financing. Some small business owners have turned to personal loans in order to get the money they need. Is this a viable option for your small business?
While there certainly are some advantages to taking out a personal loan for business expenses, you do need to be careful in the long run. Yes, this may give you faster and more affordable access to the capital you need, however you do really need to take the time to weigh the pros and cons. Below is our guide as far as what you need to know when considering getting a personal loan for your small business.
Mixing Personal Loans and Business
There are key differences between funding as it pertains to a personal loan and one that you would more traditionally get for your business. Here are some of the more critical ones that you should definitely factor into your decision-making process.
Understanding Business Loans
First off, one of the biggest advantages when it comes to a business loan is that you are limiting your own liability as far as responsibility for the money taken out. The business itself is the one applying for the loan—not you. This means that your credit score remains unaffected. If there is an issue when it comes to repayment, your personal possessions are generally not on the line.
Additionally, by taking out a loan specifically for your business, you have an opportunity to build up your business's credit score. Of course, you want to make sure that you make timely payments, but doing so can certainly help raise that FICO score. Also, keep in mind that business loans generally have higher limits—this can be a good or bad thing. Just be careful about your ability to repay whatever you apply for as far as loanline of credit amount.
Understanding Personal Loans
While there are certainly perks to a business loan, they can be more difficult to get. Especially as banks are tightening up on the necessary criteria for small businesses to qualify. Usually, your company needs to have a credit score of 700 or higher, a well-established track record as far as years business and enough collateral to back the loan.
On the personal loan front, the process is a bit more streamlined. Less paperwork, somewhat easier standards and thus a better chance of qualifying. Again though, the credit score generally needs to be there, and you are now putting your own assets on the line. Which means if the company does default, your personal property could be at stake.
Also, keep in mind, that personal loans almost always have lower limits and higher interest rates—perhaps not the most efficient way to go.
Before You Apply for a Loan…
Regardless of which you choose—personal or business—there are certain steps you need to take prior to applying. You want to ensure that you're prepared and that you gather all of the information possible.
Do you know your FICO score? 90% of banks and lenders will consider your FICO score as they evaluate your loan application. This is perhaps the most important piece of information you can have at your disposal. Knowing your credit score also means that you can assess what may need to be done to repair it.
An absolute ideal credit score will fall in the 800 range. Not all of us have such stellar scores. For reference sake, here is a breakdown of where certain scores fall:
- Bad Credit: 300-569
- Fair Credit: 570-669
- Good Credit: 670-739
- Excellent Credit: 740-799
- Exceptional Credit: 800-850
Now, this is not to say that if yours fall within the bad to fair credit range that you will automatically be disqualified. There are loan products out there for those with less than superior credit—of both the personal and business variety.
So Should You Apply for a Personal Loan?
Ideally, you will apply for a business loan and your application will sail through. You get the funding you need and you're able to cover expenses. This is not always the case, however, and so there are times when you should be prepared to go the personal loan route.
1. Your Business Loan Application Gets Rejected
Did you know that 75% of business loan applications are not accepted? Again, standards are just getting tighter and tighter, leaving smaller companies with very little choice. This is where you may think about applying for a personal loan instead.
Alternative lenders especially are a great source for personal loans, as statistics show that over 50% of US-based alternative lenders will, in fact, approve a personal loan—more so than would a business loan.
Thus, if your business submission does get turned down, consider a personal loan. This way too, with good repayment, you can start rebuilding your credit and better your chances for business funding in the future.
2. You Lack the Collateral to Qualify
With small businesses especially, banks need reassurance. The problem is many companies simply don't have the collateral to back the amount requested. Collateral may consist of one or more of the following:
- Real estate
- Equipment
- Vehicles
- Accounts Receivable
If you don't have enough considering the above, then, here again, a personal loan may be a better financing solution for your business needs.
3. You Don't Require a Large Amount of Money
More of a long term commitment, business loans tend to be upwards of at least six figures. Often, you don't require that much money. And you simply don't want to saddle yourself with that much debt.
With personal loans, you can take out sums beginning at $5,000. Maybe you just need a temporary injection of cash to weather a slower period. This is when a smaller personal loan would probably make more sense than the much larger and longer-term business loan.
Where Do You Fall?
Again, it is always important to weigh both financial products very carefully before deciding which to apply for. Also, shop around in terms of lenders. Often, alternative lenders can offer more flexible financial solutions that can be used for anything as opposed to the more narrowly defined business loans you get from a bank.
If your business is brand new, you may also want to think about a personal loan. Most lenders like to see at least a year or two in business—if you can't show that, then opting for a personal loan makes more sense.
This is not to dissuade anyone from applying for a business loan. Business loans are good to have if you can qualify; and there is, of course, the security that comes with keeping business and personal separate. But in some cases, they just aren't feasible and if you need money to keep your company moving and growing, then definitely look into a personal loan. If you are looking for a business loan, call First Union Today!