If you have a brand new business idea and you’re sure it’s going to do well because you’ve carried out the right amount of market research, what’s stopping you from getting started? Why have you not yet launched that business?
There could be any number of reasons, but one of the biggest is a lack of funds to do so.
If this is the case, you might be considering taking out a loan. If your business idea is strong and you’re sure it will make money, then this can be a wise idea. Yet, there are so many different loans available; which one is right for you? Let’s look at the main differences between a personal loan and a business loan so you can make the right choice.
The most important thing to think about when you take out a personal loan is that it is intended for personal use only. You can use a loan to pay for a car, to consolidate your other borrowing into one monthly payment, to carry out renovations in your home, or even go on vacation. In other words, you can use them however you want to, but you can’t (or shouldn’t) use them for business purposes. Each loan will have a set of terms and conditions attached to them, and many will state this – the loan might be called in if it is discovered you used it for your business.
Something else to consider when it comes to a personal loan is that you might only be able to borrow a small amount – relatively speaking – and when it comes to your business, that might not be enough. Because personal loans are meant to be for the things we mentioned above and similar ones, the most you can usually borrow is around $25,000. Although this might be enough to start a business, you’ll usually need more if you want to do it right.
If you do find a lender willing to let you utilize their personal loan products for your company, make sure you understand entirely who is really responsible for the debt. If your business is a limited company or a limited liability partnership, any business loans you get will be in the name of the company. This means that the business will be held accountable for the debt in the end. In other words, you won’t have to pay should the business fail. If you take out a personal loan, however, you will be responsible for the repayments. So even if the business has to close, you’ll still need to service the debt. The only exception is if you have signed a personal guarantee, in which case, if you can’t pay, your guarantor will be responsible instead.
The interest rates on personal loans are often higher than those on business loans (particularly on short term loans). One of the causes is the variety of application procedures involved. A personal loan will typically be obtained within a few days and processed within a week at most. In order to minimize risk, lenders charge people with personal loans greater interest rates than business loans.
On the other hand, business loans are less hazardous for lenders due to the information usually disclosed by the long application and qualifying procedure, which means lenders are surer that companies will be able to repay the full amount. As a result, business loan interest rates are often lower, and the total payback term is typically longer.
The great thing about business loans is that they are specifically designed for business, and therefore they can be used to move to a new building, buy stock, or purchase all the equipment and do all the marketing you might need for a new business. There are even different kinds of loans you can obtain depending on what you need the money for. Some are straightforward loans, and others are more specific, such as invoice factoring, which allows for better cash flow.
Just like personal loans, a business loan application doesn’t have to be an arduous, time-consuming process. As long as you have an accurate business plan and you can articulate what you need the money for – which could be in the hundreds of thousands of dollars because you can borrow more with a business loan – you should be able to borrow the money. Plus, not only can you visit a bank to do this, but you can also look at peer-to-peer lending and investments as other examples.
One of the most often stated advantages of a personal loan versus a business loan is the quick nature of the setup; historically, business loans have been seen as extremely difficult to organize. To some degree, this is true, but only if you have a complex business structure to think about, as this will mean the lender has more variables to take into account. However, with the development of alternative company financing, the procedure is no longer as slow. In certain instances, it may be just as quick as obtaining money via a personal loan.
Credit is important for your personally and within your business. By taking out a loan in your business’s name, you’re helping to establish credit for your company, which will allow you to obtain additional financing in the future. Your company has a separate credit score from your personal score, and some lenders consider it when you apply for financing. Obtaining a loan for your business and repaying it on time can assist you in improve your credit score and reassure prospective lenders that your company can be trusted with further financing as and when it is required.
As you can see, the decision between taking a business loan and a personal loan is not always simple. However, when you look more closely at exactly what you need, the decision becomes clearer. The key to finding the right type of borrowing for you is to ensure you research it properly in advance. In that way, you know you’re getting the right product for your needs and that you understand the repayment terms and interest rates.
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