Should You Take Out a Personal Loan to Start a Business?

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You’ve spent several hours mapping out the framework for your new business venture. The business plan is intact, and you’re ready to launch, but there’s only one issue – you need capital to get started. 

There are many ways to secure the funding you need. Many aspiring business owners and entrepreneurs leverage personal loans and small business loans to secure their startup funding, but are they most ideal for your new venture? 

Here’s a closer look at the two, along with a unique platform to help you find the perfect loan to start a business. 

Small Business Loans Made Easy

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Read this review about Lendio, a small business loan online marketplace to access a network of lenders with one simple application.
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Business term loans are a stable way to get funding to grow your business and improve your credit. Read how to get one through Lendio.

What is a Personal Loan?

As the name indicates, a personal loan is a debt product that can be used however you see fit. The lender will likely inquire about your intended use but typically won’t follow up or monitor how you spend the funds. 

So, you can pay off high-interest debt, fund home renovations, take a trip you’ve been dreaming of, make a big-ticket purchase, and the list goes on. But as a new business owner, it may be more appealing to use the funds for startup costs for a few reasons. 

The qualification criteria are less stringent than what you’ll find with a small business loan, for starters. Most lenders review your credit score, income and current debt obligations to determine if you qualify and how much funding to offer you. But suppose you apply for a small business loan. In that case, you could be required to provide more information and detailed projections regarding your new business venture. 

Furthermore, personal loans come with a fixed interest rate determined by your credit rating – the higher your credit score, the more competitive the rate. And the monthly payments are fixed for the life of the loan.

Keep in mind that some lenders assess an origination fee. You also want to consider the repayment term for personal loans. It’s usually between three and five years, which means the payments could be a bit steep and stretch you thin financially as you work to get your new business up and running. 

What is a Small Business Loan?

Small business loans are another popular funding source for new small business owners. Traditional banks, credit unions, online lenders, and the U.S. Small Business Administration (SBA) offer them. 

You can choose from an assortment of small business loan options, including: 

  • Working capital loans: These are installment loans that operate like personal loans. You’ll get a lump sum payment and repay in monthly installments over time. But the funds must be used to cover business expenses, like inventory, marketing, payroll and rent for your workspace. 
  • Business line of credit: You’ll get access to a pool of funds that you can withdraw from as often as you need during what’s referred to as the draw period. You can also repay a fraction or all of what you owe during the draw period. You’ll be subject to interest-only payments on the amount you borrow. When the draw period ends, the lender converts the remaining balance into a loan payable in monthly installments (for principal and interest) over a set period. 

Small Business Loans Made Easy

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Read this review about Lendio, a small business loan online marketplace to access a network of lenders with one simple application.
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Business term loans are a stable way to get funding to grow your business and improve your credit. Read how to get one through Lendio.

Can Personal Loans be Used for Business Purposes?

As mentioned above, you can use personal loans for business purposes. Lenders don’t restrict the usage of funds, despite inquiring about the intended use during the application process.

Should You Get a Personal Loan or Business Loan?

Whether to take a personal loan to start a business or not depends on your financial situation and how much you want to borrow. If you have good or excellent credit and a steady source of income, personal loans usually aren’t hard to get. And you won’t have to answer any questions about your new business venture from the lender. But there’s a significant drawback: the amount you’re eligible for may not be enough to cover your projected startup costs. 

By contrast, a small business loan could get you an ample amount of working capital. But the lender may request collateral along with supporting documents to substantiate your funding request. Still, a business loan is worth a shot, particularly if you need $100,000 or more to fund your new venture. Plus, the interest rates are competitive, and you could qualify for an extended loan term, which makes the monthly payments more affordable and helps alleviate the added stress of turning a significant profit out the gate. 

Can You Use a Personal Loan to Start a Business?

Yes, you can use a personal loan to start a business. However, you want to explore business funding opportunities to ensure there’s not a better fit for you before resorting to a personal loan to cover startup costs. 

How to Get a Loan to Start a Business

With so many lenders and small business loan products available, finding a product that fits your needs can be overwhelming. Fortunately, innovative platforms like Lendio let you explore funding options from over 75 lenders in their network in one place. 

It’s free to use their online tool, and you can apply in 15 minutes or less without impacting your credit. If there’s a match, you can view and compare offers for lenders to decide which is best. Lendio will also provide recommendations based on the information provided in your application. 

If you choose to move forward, you can submit a formal application and possibly receive funding in as little as 24 hours. 

Here’s a quick look at funding options through Lendio: 

  • Accounts receivable financing: up to 90 percent of receivables in as soon as 24 hours; no minimum credit score requirement 
  • Business acquisition loans: $5,000 to $5,000,000 in as soon as 30 days; minimum credit score varies 
  • Business line of credit: $1,000 to $500,000 in as soon as one to two weeks: minimum credit score of 560 and at least six months in business 
  • Business term loans: $5,000 to $2,000,000 in as soon as 24 hours; minimum credit score varies
  • Commercial mortgage: $250,000 to $5,000,000 in as soon as 45 days; minimum credit score varies 
  • Credit cards: credit limit varies by card issuer; minimum credit score of 680
  • Equipment financing: $5,000 to $5,000,000 in as soon as 24 hours; minimum credit score of 650 and 12 months in business (if your credit score is less than 650, you could qualify if cash flow if revenues were stable in the past three to six months)
  • Merchant cash advances: $5,000 to $200,000 in as soon as 24 hours; minimum credit score varies 
  • SBA loans: up to $5,000,000 in as soon as one to two months following approval; minimum credit score varies by SBA loan product 
  • Short term loans: $2,500 to $500,000 in as soon as 24 hours; minimum credit score varies 
  • Startup loans: $500 to $750,000 in as soon as two to four weeks; minimum credit score of 680 and at least six months in business 

Are you ready to take the first step towards opening the doors to your new business? Apply now to secure the funding your venture needs and deserves.

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