Does it make sense to finance your business with a personal loan?

When you start a shop, one of the first pieces of advice you’ll receive (and hear again and again) is that you should never mix up your personal and business finances. Easier said than done, right?

Operating from a single bank account or just charging one credit card can be all too tempting, especially in the early years. But there’s a reason this advice is given early and often—it’s critical to the success of your business and, most importantly, helps protect your personal finances.

But there are cases when this rule is not so easily applied. For example, “Can I use a personal loan to fund my business?”

The answer is yes, of course, but what business owners need to ask is,Should I am using a personal loan to fund my business?”

Knowing the importance of carefully considering the combination of personal and business finances, let’s break down when it makes (and doesn’t) make sense to finance your business with a private loan.

If you are just starting out

For young companies with limited financial history to a small business loan will be nearly impossible. It’s likely that your only option will be a personal loan.

To qualify for a personal loan, your credit score will be as important as ever, and it takes about 640+ to even be considered. If you do qualify, be prepared that personal loan amounts tend to be smaller. You may not get all the capital you need to get started.

should you take it Does it make sense? If it’s all you can qualify for and you absolutely need the sum to get things going, then yes, this is the best scenario for taking on personal debt to help your business.

But I would suggest making sure you are at a point where your business is about to generate revenue or has started generating revenue. How else are you going to pay off the loan?

While it’s a good solution for new businesses, you need to make sure you have a clear plan on how the loan will be repaid. Remember, since this is a personal loan, non-payment greatly affects your personal credit score.

If it is cheaper than your business loan offer

If you applied for a business loan and thought the interest rates were astronomical, chances are a personal loan can offer you better interest rates. You should always take the least expensive capital available, so for the right scenario it would make sense to use a personal loan instead of a business loan (if it’s cheaper). But here are two questions:

  1. how much cheaper is it If we’re just talking about a point or two, it’s probably not worth it. This puts your personal finances at risk, blurs the line between business and personal life, and means you miss an opportunity to build business credit. Also to consider: many business lenders work with their clients more than once. Let’s say you take out a loan from them and need another one in the future. Your chances of getting a loan from the lender are greater, not to mention you could get a better interest rate since you have proven yourself to be a responsible borrower. So rate the cost-benefit here. Is it worth giving up a few interest points when saving for future opportunities?
  2. How are you going to pay it back? If you just qualified for an expensive business loan, why? It may be that your business is doing well but your doors haven’t been open long. Or it could be because your business finances are struggling. If it’s because cash flow is low, think twice here. If you are using the loan for business purposes, you are likely to repay it with business funds. What happens if these funds are not there?

If it’s your only option

If you’ve been denied a business loan and a personal loan is your only option, I’ll ask the same question again: how will you pay it back? If you know exactly how you’re going to pay off the loan, a personal loan could be the answer. But if your business has been denied a loan, is it because finances are an issue? This could cause problems not only for your business but also for your personal life if you take out this loan.

There are certainly times when financing your business with a personal loan might work, especially when it’s the cheapest capital available—or the only capital available. No matter what, if you don’t have a clear idea of ​​how to pay off the loan, take a step back. This affects your business and She. It’s fine as a starter solution, but if you’re denied a business loan or don’t qualify yet, ask lenders why. Find out the areas of your business that need improvement, focus on them and make changes, and work to build credit options that rely more on your business finances and less on your own.

About Gloria Skelton

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