Whether you want to start a business or finance one that is already functioning, you may find your financing options reduced to taking a loan. In such a case, you have the option of taking either a personal or a business loan.
Given the unpredictable nature of businesses, it may not be wise to mix your personal and business finances. This advice notwithstanding, there are some circumstances in which using personal credit for business finances makes sense.
When to use personal credit for business finance
When your personal credit is more attractive
A credit score is among the main factors that determine the amount and rate of a loan. If your venture hasn’t established good credit, a business loan may not be advisable.
Such a loan will probably be denied or approved under restrictive terms and high rates. On the other hand, you can still access finances by going for a personal loan if your credit score is more attractive.
When you are setting up
Lenders will require proof of the revenue generated by the business to determine its capability in repaying the loan. This requirement puts you at a disadvantage when you’re setting up. Without any experience or books to show, a personal loan may be the only way to go.
When you have no collateral
Business loans are mostly offered as secured loans. This means that collateral is required before approval. When starting a business you probably have no asset that can be tied to the loan or may not want to risk other existing assets due to the risk associated with businesses. In such a scenario, a personal loan will do since it requires no collateral.
When the loan is within the personal credit limit
Business loans attract higher interest rates than personal credit. However, personal credit comes with a lower limit compared to that of a business. The question you should ask yourself is; how much do you need and what will it cost you?
When the amount you need can be covered by personal credit, then go for it. You will avoid paying heftier interest that could run into thousands of dollars if you were to take a business loan.
When you don’t have a business plan
Another requirement for a business loan is an elaborate business plan. That’s easier said than done. The passion and hard work that you are ready to put into your venture cannot be captured on paper. What lenders want to see is an actionable plan that shows how capital will be utilized and the expected returns; to the last dollar!
In addition to this, lenders set stringent measures on how a business loan is to be utilized. Instead of allowing these requirements and terms to curtail your venture, you can tap into your personal credit as you get a feel of the business environment.
Personal credit might be cheaper and a good alternative to a business loan, but there are a few things to consider;
The major drive of setting up a business is to generate profit. You inject part of the returns back into the business, and with time it grows to greater heights. If successful; what started out as a small business will one day grow into a huge venture.
To achieve that major boost, you may find yourself in need of a sizable amount. When self-funding can’t cover this, you may have to turn to lenders for a business loan.
Lenders will be more willing to finance your business if they have taken part in its growth. The point here is that your bank needs to recognize your business as a separate entity.
This kind of recognition is only possible if you take and manage business loans with them. Not only will this push your loan applications to the top of the pile, but you will get financial advice from the bank.
Using personal credit for business finances is wise if it makes business sense to your specific venture. If it comes down to letting your business go under or abandoning your dream business for lack of financing, you have a winner. However, you should also be aware that personal credit does not elevate your business credit, something which may come in handy for future financial needs.