How Personal Loans Can Help Fund Small Businesses

Published: Nov 29, 2017

Can I use a personal loan to fund my small business venture?

Yes, it is possible! Personal loan offers flexibility to borrowers for personal purposes, and funding a small business can be one of them.

While the ideal is to have your personal savings to support the business, there comes a point when raising capital through self-funding is “un-achievable” and financial difficulty arises. You will need financial funding especially during inventory build-up or store renovations. That financial gap is where money lenders and loan institutions will back you up.

Is using personal loans for businesses legal?

Technically, personal loans are issued for personal purposes. To classify if its legal or illegal rests on how you disclose the loan purpose.

But then, as a borrower, you can opt to pursue a personal loan even if for business purposes. The banks do not focus on the actual loan purpose for personal loans, but rather in your creditworthiness. They will just have to establish your identity and rate your credit score cards based on your repayment capacity and historical credit dealings.

Personal Loans - Money

Photo by Vitaly on Unsplash

Since personal loans are granted to individuals with credibility, the only collateral required is the personal guarantee that you’ll pay the loan. Once you guarantee for the loan, you will be solely held responsible for the whole loan obligation regardless of where the loan proceeds were used.

Personal loan or business Loans

Though the general process between differing loans is almost the same, there’s a defined line in distinguishing the two.

Business loans are offered strictly for business use only. This include store renovations, working capital requirement, franchising loans, and others under a similar tone. The borrower may not necessarily be the company, but the documents required are related to the borrower’s business.

Business loans may tend to be more stringent as the lender must establish the loan purpose and the business’ capacity to pay the loans on a stand-alone basis. Moreover, a collateral usually related to the business is commonly required.

You should also read: Questions before starting a business.

Personal loans, on the other hand, is a more flexible type of loan. This loan is usually within a shorter term and only backed by your guarantee to pay the loan. Furthermore, the loan purpose isn’t heavily established.

And since no tedious credit and collateral checks are required aside from the borrower’s credibility to pay, loan processing is way faster versus another type of loans.

When is personal loan right for your business

You just started your business

If you have a profitable business in your mind, you definitely need the capital to bring the business to life. You’re lucky if you have savings to support it, but what if the capital isn’t established yet? You’ll see how time and effort consuming it is to look for funds to have your business rolling.

Yes, you can seek help from your family and friends. But along being financially indebted to them, you’ll also be intangibly indebted to the generosity given. Nonetheless, personal loan works similarly to the financial aid given by a family member since no collaterals are required. On a positive note, you need not worry how to reciprocate the kindness given.

But keep in mind that aside from personal loans, there are many types of lenders that are probably enthusiastic and capable to support your new business.

You only need a small amount or fund

If you seek for only a small fund to support your business, a personal loan works best for you. The time, effort, and costs invested by the bank to grant a business loan deal regardless of the amount involved are all the same. The banks would more likely finance a business loan if the business operation and the loan amount needed is significant.

This is the reason why personal loans are offered as it is distinctively designed for minimum funding requirements. 

When you lack assets to use as a collateral

As previously mentioned, personal loans are usually only backed by an agreement to repay the loan based on the borrower’s credibility and capacity. A collateral is not a great issue in granting a personal loan.

This is also why the processing for a personal loan is faster, as no collateral is required that will be subject to stringent processes.

Do you really need to get a loan or borrow money? 

While a personal loan is one of the easiest options to raise a business capital, other options are still available such as using credit cards to build-up inventory, obtaining a loan with a collateral, or even seeking help from your family and relatives. However, these do not contain the flexibility offered by a personal loan, which can be used as a “signature loans” or “unsecured loans”.

Aisha Workman is an online financial consultant for Cash Mart. She works in financing for over 5 years and is an authority on emerging financial services. She also writes on trends in the industry such as consumer lending loans, stock investing, and retirement plans.