Can A Personal Loan Help Your Business: Top 5 Financial Mistakes to Avoid

Cash flow is often a serious problem for small and start-up businesses, and business owners can see a personal loan as the fastest and easiest way to get the money they need. However, a business owner considering the possibility of obtaining a personal loan to help business should know what he is getting involved in. It is important to understand the possible long-term consequences and have plans to ensure that the loan will really help the business move forward. 

If you need a loan for example for inventory, office equipment, office space and advertising, you can easily and quickly take a personal loan in special microfinance organizations. But if this is beneficial and if you will be able to repay it in time, we will consider it in detail in our article.

Is a Personal Loan for Business Profitable?

Perhaps you are already familiar with the concept of personal loans in the consumer sector. You apply for a loan and most lenders have the amount transferred to your current account after the funding application is approved. After the deposit, you can spend money as you like. 

All you need is:

  • make fixed monthly payments back to the lender;
  • pay a fixed interest rate;
  • repay the loan within the period specified in the agreement. 

Many business owners prefer to use personal loans for business, because the approval process is usually easier, especially for startups. When you apply for a loan for your business, it is your credit history and credit rating and personal income and debt that determine your ability to qualify for the loan. Credit, cash flow, annual income and debt of your business are irrelevant. 

Business Advantages and Disadvantages of Personal Credit

We recommend that you get acquainted with all the positive and negative aspects of using a personal loan to finance your startup or expand your existing business. Understanding both sides can help you decide if this is the right move.

Some of the main advantages of a personal loan for business use include:

  • applying is very easy and fast. To do this, you only need to fill out the form on the lender’s website;
  • a minimum package of documents is needed for approval;
  • speed of decision-making. In most cases, approval comes within 24 hours;
  • the opportunity to choose a convenient repayment schedule and the optimal loan amount.

If we talk about the shortcomings of personal lending, we can distinguish such points:

  • using a personal loan for a business can negatively affect your personal finances. If you take a personal loan, and your business does not generate enough income so that you can repay it, your credit rating may suffer;
  • if you choose a business loan, the loan amount can be much larger. This is an advantage if you need a lot of money;
  • personal loans won’t help boost your business’s credit rating. The history of personal loan payments is not transferred to the main commercial credit bureaus, so it may be better for new companies to access a business credit line with a personal guarantee

Before applying, we recommend that you review your personal credit report and rating. This will help you better understand which loans you are more likely to qualify for. Borrowers with good credit ratings have a better chance of getting a loan from online lenders.

Top 5 Financial Mistakes to Avoid

Before taking out a financial loan, we advise you to pay attention to the most common mistakes that business owners make:

  • Take more than you need. Take into account expenses and projected income, and if you still take out a loan, take only what you can pay. After all, there are times when a business burns out, or a startup does not start.
  • Don’t know all the terms of the loan. Business owners should be aware of the potential risks, read everything written in small print. Please note such items as early repayment penalties, fixed dates, collateral, payment structure and date. Make sure that the interest costs do not exceed the principal amount of the loan for the entire duration of the loan, the fee for issuing the loan, etc.
  • Incorrect credit type selection. Some owners choose a personal loan, believing that it will be easier to get approval. But it must be borne in mind that loans that are designed to finance a business can often have more favorable conditions. They are better suited to the short-term needs and long-term goals of your business.
  • Credit is used to replace the missing funds. This is an extremely wrong tactic. Money should be used to increase income. If you stick a patch on a short-term problem, and not completely solve it, then you simply postpone the death of the business.
  • Lack of business information. Providing the creditor with accurate and correct business information should be the main criterion for the applicant. Any discrepancy between the information provided and the documents submitted may cause trouble, and the creditor may question the reliability. 

Like other important financial decisions in your life, getting business credit is as important as other decisions. Your career, children’s education, finances, earnings, household and daily expenses depend only on how your business works. The more the business expands, the better your earnings will become. Therefore, to expand the business and increase life status, you simply cannot afford to make mistakes when applying for business credit.

Adam Hansen

Adam is a part time journalist, entrepreneur, investor and father.