Personal vs Business Loans for Your Startup: What to Consider

If you are in the process of starting a new business, you might already know that getting a business loan from the bank is almost impossible today. And the fact is that lots of startup ideas might not need a huge amount of funding in the beginning, which can make it seem really pointless to apply for a bank loan that often involves getting thousands or even tens of thousands of pounds in funding for your business. If you are starting a new business that’s going to be based at home, for example, you might only need a few hundred pounds or a couple of thousand pounds to get the equipment that you need, get your online presence set up, and get everything off to the right start.

To do this, you might be considering getting a personal loan instead. However, there are some major differences between getting a personal loan and a loan that is designed for your business that you will need to be aware of before you decide on the right option for you and send your application.

What is a Business Loan?

First of all, let’s take a look at what business loans are and how they work. These loans are designed for specific business use. You will usually get one to cover expenses and fees that you’ll incur when starting a new business, or to get additional cash for growing your existing business, for example, if you need money to hire a new employee or get equipment that you can use to expand your product line. You might apply for a business loan if you are relocating your business premises, need to invest more money in marketing a product or service or purchase inventory. Either way, the main purpose of a business loan is typically to provide businesses with money to spend that will ultimately help them boost their profits over time.

Why Apply for a Business Loan?

Applying for a business loan means that the money you borrow is for your business rather than for you. When you take out a business loan for your company, it’s your company’s assets that are at risk if you are unable to make repayments, rather than your own. This can offer more protection for your personal financial situation, especially if you are trading as a limited company rather than a sole trader. Bear in mind that if you are a sole trader, things are a little different since in this situation, you and the business are the same entity rather than separate.

What is a Personal Loan?

On the other hand, a personal loan can be used for pretty much anything that you like. People take out personal loans for a wide range of different reasons such as renovating their home, purchasing a new car, buying new appliances for their home, or funding another expensive purchase that would otherwise take them a long time to save up for and pay out of their own pocket. Starting your own business might be a reason to take out a personal loan. However, this will take your personal financial situation into account rather than the financial situation of the business, and in the future, any repayments that you make will improve your credit score but won’t help your business with financial records that could improve its credit score.

Why Apply for a Personal Loan?

A personal loan might be the better option if you are starting a business from scratch and would struggle to get a business loan simply because the business doesn’t have any records. Along with this, there tends to be more variety on offer when it comes to personal loans, including short-term loan options if you only need a small amount of money to get your business started, while business loans tend to be larger. If you need a small injection of cash to get you through the first couple of months, you can try searching the Pay Day Loans available from a panel of lenders using Payday UK, a broker that will help you find the best loan product for your needs. However, bear in mind that your personal credit score and ability to borrow in the future might be affected if you are unable to keep up with your repayments.

Why is it Harder to Get a Business Loan?

For established businesses with a long financial record, getting a business loan might be much easier. This is because when deciding whether or not to provide you with the funding you’ve applied for when it comes to your business, lenders want to know that you are going to be responsible with the money. They also want to know that your business is actually making money that you can use to make repayments. Because of this, applying for a business loan the day after you decide to start your new business is likely to result in an immediate rejection.

Why Using a Personal Loan Can Be a Good Idea

In this situation, if you have just started a brand new business and need some extra money right now to get things started and running smoothly, chances are that trying to get a business loan is going to take up a lot of time with very little chance of success. While you can find lenders that do provide startup loans in this situation, even these loans are often not quite as easy to get compared to a personal loan if you have a good credit score and a good personal financial record. Getting a personal loan can be something that takes mere hours to do, and you could have the money that you need for your business in your bank account on the same day.

What to Consider When Using a Personal Loan for Business

When it comes to using your personal loan to fund your startup, it’s important to approach it in much the same way as when taking out a personal loan for anything else. Bear in mind that if you cannot make repayments or miss payments on your loan, this is still going to impact your personal credit score and might make it harder in the future for you to get products such as loans, credit cards, and mortgages for personal use. Even though you are borrowing this money for your business rather than yourself, it’s crucial to approach it in the same way as you would when borrowing money for home improvements or another personal reason.

Affordability is one of the main factors to consider when you decide to use a personal loan for your business purposes. Consider how you are going to make repayments. This might not be a problem if you are starting a business alongside working in employment full-time and have a regular payday, but if you’re quitting your job to start a business, making sure that you’re going to have the funds available to repay your loan is essential. It’s also worth considering any alternatives that might work better for you such as angel investments or crowdfunding for your business.

When starting a business, getting a loan isn’t always easy. For some business owners, taking out a personal loan has a better success rate, but there’s lots to consider if you are thinking about taking out a personal loan for your business to use.