Accounting & Finance

Business Loans vs. Personal Loans

Most new businesses to get their start in life with a loan. Whether the money comes from family, friends, colleagues, or the bank, it’s often the only way to start a business. The good news is there are a few funding options available with professional lenders including business loans and personal loans.

Personal loans are popular with startups and smaller ventures because they are often quicker and easier to secure. The eligibility criteria for a personal loan is usually less rigorous and the application process much quicker. Australian lenders like Latitude Finance provide personal loans and they understand these loans are often secured by small business owners to kick start their business. Keep reading to find out whether a personal loan may be the right way to go at least in the early stages, for your business.

The Pros and Cons of Personal Loans

As already mentioned, personal loans tend to be much easier to secure with the eligibility criteria more relaxed. There are fewer administrative hoops to jump through and in most cases, the only real hoop to get through is the check carried out on your credit report. Conversely with a business loan application there are more ticks and balances with lenders also needing to scrutinising the company’s financial statements to understand the business’s financial position.

Another big benefit for going down the personal loan path for your business is that personal loans rarely require collateral as mentioned in the article on huffington post.

It is not unheard of (actually it’s quite common) for entrepreneurs to use their homes or the homes of relatives as collateral for funding either via using the mortgage as funding or using the property as security for the personal loans and this strategy is a lot more risky should the business fail and the loan needs to be repaid immediately. With a personal loan that is secured by you, your company can off the ground fast, and the stakes remain manageable.

However personal loans aren’t designed to support businesses, so the lending limits are often much lower. Depending on whom you work with, it may not be possible to borrow all the money that you need for your business. Plus, higher interest rates associated with personal loans might become a problem when you’re trying to build up revenue and ideally profit in those early years.

The Perks and Limits of Business Loans

Ideally young enterprises would prefer to start out with a business loan. There are obvious perks to applying for a loan specifically designed for corporate funding including the security remaining with the incorporated company. With a business loan, you also get the opportunity to protect your own interests. Most lending plans limit the degree of personal liability for future failures. So, if the business does end up collapsing, your own personal credit won’t be affected. Ultimately, when you show that you can manage business loans responsibly, and your business is growing, securing additional funding will be much easier.