Should You Consider a Personal Loan to Fund Your Startup?

7 min read • Published 10 March 2023
Written by Anshul Gupta

When it comes to financing your new business venture, the first thing that might come to mind is a business loan. However, availing of a business loan can be quite challenging as financial institutions are particular about various factors. It is often difficult for new businesses to qualify for a business loan.

In this regard, opting for a personal loan can be beneficial to fund your startup. To help you evaluate whether to use a personal loan to fulfil your business needs check out the following sections to get all the necessary information.

Is It Reliable To Use Personal Loans As A Way Of Funding A Startup?

The quick answer is yes. A personal loan is one of the most convenient financing options for a new venture. A personal loan is a line of credit that is typically used to make substantial purchases that are important to your personal circumstances. This could include costs related to emergency expenses, wedding expenses, etc. However, if you are starting a business, you can use a personal loan to cover business-related expenses.

A personal loan is an unsecured loan and therefore there is no need for collateral. Accordingly, you can apply for loans of varying amounts and repayment tenures to support your business.

Moreover, if you have a decent credit score, you may be eligible to get a lower interest rate on a personal loan. But before availing yourself of a personal loan it is crucial to check whether the lender has any restrictions on using it for business.

What Are The Advantages And Disadvantages Of Personal Loans To Fund Business?

Personal loans are one of the most effective ways to cover expenses associated with the startup business, but they come with several pros and cons. Take a look at these advantages and disadvantages.

  • Advantages
  1. One of the notable advantages of personal loans is that the loan approval process is hassle-free. You can have the money in your account within a few days. Unlike business loans, you do not need to have a long history of financial success to qualify. 
  2. Unlike some other types of loans, you can use a personal loan to finance every aspect of your business, including startup and inventory costs. So if you need a loan to get over a temporary shortfall in money, you can apply for a personal loan.
  3. Another benefit of personal loans is that you have the liberty to choose the repayment schedule. Additionally, if required, you can often prepay your loan without any additional charges or fees.
  • Disadvantages
  1. One of the biggest drawbacks of personal loans is that they come with relatively small loan amounts. Therefore, it is not a viable option if you need a substantial amount for your business.
  2. Another notable drawback of using personal loans for business is that they typically have higher interest rates in comparison to other types of financing instruments. This signifies that you might end up paying more in the long run.
  3. This financial instrument comes with short repayment terms. This signifies you might end up paying more each month, regardless of the performance of your business.
  4. Lastly, personal loans come with several risks. This includes losing personal assets, missing out on some important tax deductions, and defaulting on repayment will hamper your credit score.

What are The 5 Important Things To Consider Before Getting a Personal Loan?

If you want to start your business with a personal loan, take some time to think about your particular circumstances and the accompanying pros and cons. It can help you avoid making any financial mistakes like opting for an inconvenient tenure, selecting the wrong lender, and many more. Here is the list of 5 aspects that you must consider before applying for a personal loan.

  1. Consider Your Needs Before Taking a Loan

A personal loan is a financial commitment and you have to pay a fixed amount as EMI that will include the interest amount. For the time being, this will be a fixed portion of your budget, so it is crucial to ensure that you are using personal loans prudently for your business. 

  1. Comparing Interest Rates in the Market

Before taking out a personal loan for your business, it is important to compare the rates offered by different financial institutions. It enables you to choose a personal loan at the lowest rate and a type of interest convenient to you.

  1. Assess the Ability to Repay the Loan Amount

Before applying for a personal loan, it is crucial to consider all pre-existing financial obligations. This includes your monthly expenses and previous loan EMIs. Additionally, you should also ensure that your income is enough to repay the loan amount, regardless of the business’s success.

  1. Maintain a Decent Credit Score 

Your credit score is one of the major factors that determine your eligibility as it indicates your overall financial health in terms of existing loans, disposable income, repayment and borrowing history, and many more. The higher your credit score, the better your chances to get personal loan approval.

  1. Take All Additional Costs Into Consideration

It is crucial to consider numerous other costs, including prepayment fees, processing fees, and late payment fees that your lender charges. This enables you to have a suitable estimate of the expenditure so that you can manage your finances better. So, before applying for this type of loan ensure to read all terms and conditions to better assess the feasibility.

Final Words

Starting and running a new venture can be quite challenging, which further becomes worse when you struggle to fund your business. In this regard, personal loans can be a great source of funding, but they come with certain risks. So, it is necessary to consider some aspects as mentioned above before taking a loan. 

FAQs

Q1. How to use a personal loan for my startup?

Ans.You can use a personal loan to get quick funding. With a personal loan, it is a good chance to use it for office space, marketing or inventory costs. Also, you can readily expand your business, business equipment, and working capital with a personal loan

Q2. What are some of the alternatives to using personal loans to fund my business?

Ans. Some of the alternatives that you can use to finance the business include business credit cards, crowdfunding, government loans, friends and family, and venture capitalists. So before making a decision ensure to explore all financial options.

Q3. What to do if I cannot get a personal loan for my business?

Ans. If you failed to get a personal loan for your business, make sure to consider a few things that might increase your chance of getting a personal loan. This includes improving the credit score and creating a strong business plan. If you are still confronting challenges in getting a personal loan, consider opting for alternative financing options.

Q4.What is the difference between a business loan and a personal loan?Ans. One of the significant differences between business and personal loans is that the lender evaluates your debt-to-income ratio for personal loans and approves the loan with minimum documentation. Whereas in business loans you need to provide a proper business plan, along with a profit and bank account statement, etc.

Was this helpful?

Anshul Gupta

Co-Founder
IIT Roorkee Alumnus and CFA with experience of structuring debt products worth more than 15000Cr for institutional and retail investors.

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