People start businesses for a variety of reasons. Usually, it is because they have identified a problem in the market that they believe that they can solve. As there are countless challenges that we face in daily life and likely just as many solutions, it is no wonder that over 100 million startups are launched each year.
When starting a new business, there are several things that you need to do.
- Create a business plan
- Secure funding
- Find the correct persons to help your company launch and grow
- Determine where you will conduct your business and launch your website
- Identify your ideal marketing strategy and build a plan
- Build your customer base
Often times, new startups stall in the early phases, and often because they did not create a solid business plan, or perhaps worse, their funding stalled. In fact, at one point, it was estimated that 82% of new business failures were due to poor cash management. This said, there are many things that you need to think about when considering your approach to funding for your startup. Typically, new business owners look for funding from investors such as family, friends, venture capitalists, and angel investors. This is the ideal approach to get the business off the ground. But once you’ve been in business for three to six months and your company starts to grow, another round of funding is often needed to ensure that business momentum can continue.
Where, however, should the money come from? Investors might not be prepared to provide another round of funding, especially when you are not yet at the point where they can reap their benefits. As an alternative to asking for funds from investors so soon after launch, it is common for entrepreneurs to look to banks, credit unions, and other financial institutions like nation 21 loans for personal loan options. Most personal loans come with repayment terms that are between two and five years with fixed monthly payments.
Pros and cons of using a personal loan for your startup – Six things you need to know
A personal loan can be a brilliant choice to provide you with the funds you need to keep your business moving forward.
- It’s easy to qualify for a personal loan – To qualify for a business loan, you will be subject to a variety of strict requirements including a need to be in business for a specified period of time, proof of revenue attainment and growth for a certain period of time, copies of your business bank statements, and more. Once all of this is requested, it is still difficult to get bank approval. Banks want to ensure that you are the real deal and a sure bet, and if they have any hesitation, your business loan request will be denied. On the other hand, if your credit rating is good or better, or if you have significant equity in your place of residence, you may find that the terms of a personal loan will be better than what you could get from a business loan.
- Personal loans fund faster – Business loans can take weeks if not months to fund. But your personal loan will likely fund within just a matter of days.
- Collateral isn’t required – to qualify for a business loan, you will likely need to provide a list of assets that can be used as collateral. And if your business isn’t doing well or something happens that causes you to fall behind on your loan payments, and those assets may be seized. Personal loans, however, are rarely secured, and as such, they do not require collateral. While your credit may be damaged if your loan becomes delinquent, the lender will not be able to seize your assets.
- Your personal credit is at risk – Perhaps one of the most significant risks tied to a personal loan for your small business is that your own credit is at risk. As you know, you need strong credit to get a primary residential mortgage, to get good interest rates on loans, to open credit cards with reasonable interest rates, and more. When you use a personal loan for your business, and your business fails, or you fall behind on your payment obligations, your personal credit score will take a plunge. A low credit score with a corresponding history of late payments will make it far more challenging for you to get approved for any other forms of credit until you can repair your score.
- Limit of borrowing – Small Business Administration (SBA) loans offer much higher loan limits than do personal loans. Business loans can fund figures into the millions, but with a personal loan, you will more than likely only be able to obtain a loan of $100,000 or less. This means that it will be far more challenging for you to make the investments that you need into your business and can ultimately further hinder your growth.
- You may pay more interest than you desire – Though no one likes to pay interest on loans, it’s simply par for the course. Unless you have an excellent credit score of 800 or above, you may end up with a high-interest rate. This means you’ll be paying far more on your loan than is ideal.
Personal loans aren’t a bad option – but do your research first
A personal loan to fund your small business isn’t necessarily a bad thing. And in fact, in many cases, it will be your only option. Therefore, if you are seeking additional funds to help your business grow, be sure to explore all of your options fully. Regardless of the loan that you go with, it will be a decision that you will need to live with for a long time. Not only that, but the decision may have a significant opportunity cost because as mentioned if your business goes south and you have payment problems, your personal credit score will take a hit. As a result, your personal expenses and needs will be negatively impacted. With the proper research, however, you can make a well-informed decision and be well on your way to a loan that will take your business to the next level.