A confident approach to managing loan debt can ensure a long, healthy life for your business and bring peace of mind to you, the business owner. The right financing can come from many places, including a business or personal loan. When it comes to financing a business, which kind of loan should you choose?
Business loans allow you to use your company’s financial reputation, including credit and cash flow history, to earn approval. These loans often come with strict terms concerning how the money can be used, and you will likely be asked to offer up collateral.
In contrast, personal loans are given to the individual. Your lender will evaluate your personal income and credit, rather than that of your business. Typically, personal loans allow more flexibility in how you apply the funds, and many do not ask for collateral.
When is a personal loan your best option? When is it better to wait for a good small business loan? Consider these scenarios to learn if a personal loan is the right match for your business.
Securing a traditional business loan through your bank can prove challenging for business owners just starting out. In a recent university study, only 34% of small businesses received funding through their bank, compared to 75% of larger businesses. If you find yourself in any of the following scenarios, a personal loan might be the perfect fit.
If you haven’t yet opened your doors.
Your business’s ability to speak for itself is an important factor in securing a business loan. A comprehensive business plan, reliable cash flow, and a visibly thriving facility all improve your chances of approval. A brand-new business owner may encounter obstacles. If you’re still in the early stages of getting your business off the ground, consider using a personal loan.
If the amount you need is small.
Many banks are reluctant to issue small loans, which yield less interest for the bank while costing the same amount of work as a larger, more lucrative loan. If your desired loan amount is less than $25,000, you will likely be out of range for a traditional-term loan. The SBA guarantees loans as small as $5,000, but strict acceptance criteria and less-than-excellent credit may keep you from qualifying. If the amount you’d like to borrow is small, seek out a personal loan for a better chance of approval and lower rates.
If you’re worried about collateral.
After cash flow, insufficient collateral is the most common reason small businesses are denied loans, according to the study mentioned earlier. Generally, online lenders or SBA lenders won’t deny you a business loan if insufficient collateral is the only thing holding you back, but traditional bank loans may not be so lenient.
Many personal loans are unlikely to require collateral. If your savings or investments are looking thin, and if offering your home as collateral is out of the question, you may want to consider a personal loan.
Personal loans can prove a strong choice for business owners with unique limitations and concerns. However, if you have good credit, collateral, and a strong business plan in your corner, you might also consider financing with a business loan.
If you think you might qualify for an SBA loan.
An SBA-guaranteed loan can provide you with lower rates, generous payment terms, and more flexibility in applying your loan than you’ll find with other business loans. If you have the right background to qualify, as well as the patience for SBA’s lengthy paperwork and longer approval window, a small business loan could be your best option.
If you’re confident you’ll be able to repay quickly.
High interest rates can scare small business owners away from borrowing through banks. However, if you’re confident in your ability to repay quickly, a business loan (particularly a short-term loan) may be the perfect fit. Short-term loans are also a good option if you’re borrowing to cover seasonal expenses or cash flow interruptions. You’ll be able to agree to a higher interest rate with the knowledge that you’ll be paid up and debt-free quickly.
If you’ve got a stellar track record.
Consider this scenario: Your business is already up and running, you’re backed by excellent credit and assets, and you’ve got a plan for your funds that makes the bank confident in your mutual success. Sound like you? It might be time to forge ahead with a traditional business loan. You’ll improve your credit score and enjoy predictable monthly payments.
Your lender has your shared success in mind. The right financing option will help you realize that success and build strong relationships with the institutions that support you. With the right funding in place, you can set your eyes on the ultimate goal: watching your business flourish.