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Should You Get a Personal Loan to Finance Your Business?
One of the most important parts of running a business is financing. Be it you are a new startup or many years into the business, you are likely going to find yourself in need of additional financing more than a few times.
Getting a business loan is hardly ever an easy task, especially when you are just starting out or when your business is short in cash, finding a bank that is willing to lend you a small business loan can be very difficult. It is usually easier to qualify for a business loan when your business has a certain track record.
Nevertheless, in order for your business to survive and thrive, it is natural to consider taking out a personal loan to fund as capital for your business.
While there is no definite answer to this, there are certainly some things to think about - why are you getting a personal loan instead of a business loan, and what are the pros and cons of getting a personal loan versus a business loan to finance your business.
Advantages of Taking a Personal Loan for Business
When traditional or alternative business financing are not accessible, some business owners may end up taking a personal loan to finance their business needs. The process of applying for a personal loan may be relatively easier, and approval usually takes just a few days or even within a day is possible. On the other hand, banks can take 2 weeks or more to process your application.
The documentation required is also simpler compared to a business loan, where the bank would require more information such as a concrete business plan, financial statements, and bank account statements etc. Usually for a personal loan, all you need is your identification and latest 2 years income tax statements for a bank to assess your personal loan.
However, if the reason you got rejected for a business loan is because of a poor credit rating, then it is also highly unlikely that your personal loan will be approved too. A good credit score is always the top requirement as it reflects a solid history of making your credit payments on time and of paying back the loans you owe.
Downsides of Using a Personal Loan for Business
Personal loans tend to have higher interest rates compared to business loans, which can start from a flat annual interest rate of 3.5% for a personal loan versus flat annual interest rate of 1.29% for a business loan (as of June 2020). However, there are often promotions going on for personal loans, such as $0 processing fee or cashback. So do look out for any promotion available for different banks.
Another downside of a personal loan is the limit on financing amount. Personal loans tend to offer a smaller loan amount as it is limited by four times of your monthly income in Singapore.
Lastly, you as a borrower are personally responsible for the personal loan. This means that defaulting on the loan will affect your personal credit score. In addition, for a person without the ability to comfortably pay off the loan amount in case things don’t work out, the risk of burdening yourself with a loan can potentially affect your personal life.
When a Personal Loan for Business Makes Sense
Looking at the pros and cons of getting a personal loan, business owners should first consider business financing whenever possible. If your company has been in operation for a number of years, and you can wait for a reasonable amount of time for the funds, as long as your company qualifies the lending criteria of banks or financial institutions, a business loan will be more suitable as it is designed in a way to help companies gain working capital for business needs.
However, if you do not have an established business history, a personal loan could definitely come in handy. Since personal loans are indeed personal, how you want to use the funds is totally up to you. Hence, using your personal loan to finance your business is similar to investing in your own business with your own capital.
Moreover, if you only need a small amount of capital, a personal loan may work for you.
When to Use a Business Loan
Since a business loan is designed specifically to cover business-related needs, it would make sense to consider a business loan first if your company has been operating for awhile and is profitable. The loan quantum of a business loan is usually higher compared to a personal loan, hence if you need a substantial amount of funds, a business loan would be a better choice.
There are also government-assisted financing schemes under Enterprise Singapore for business loans such as the Enhanced Working Capital Loan and the Temporary Bridging Loan Programme, where interest rates are usually kept low in order to help businesses gain access to financing for working capital and to ease cash flow.
Although the process of a loan application can be lengthy and cumbersome, the lower interest rates and better repayment terms will certainly worth the effort if you qualify.
If you are still confused about the types of business loans available, be sure to read up and understand more about business loans here before making an informed decision. And if you do not want to go through the hassle of applying for a business loan on your own, you can always check out your eligibility here and go through our Smart Towkay platform. Besides business loans and personal loan, you can also explore alternative funding options such as Peer-To-Peer lending or crowdfunding.
When it comes to business financing, many factors and conditions can affect your eligibility to qualify for a business loan. The lending criteria also differ across different banks and financial institutions. However, if you do qualify for a business loan, it is often the better route to fund your business. But if you are just getting started, a personal loan can be a valuable tool for covering your business needs. Most importantly, make sure you explore the various financing options available to you so that you get the best kind of financing with the costs and terms that work well for you so that you can focus on growing your business.