For small businesses trying to get off the ground, a cash shortage can be painful. Sometimes a small business loan can help, but these aren’t always the best answer. Let’s find out when personal loans are right for small business owners.
What’s the Difference Between Business Loans and Personal Loans?
The difference between small business loans and personal loans is the identity of the borrower. In a small business loan, the business is the borrower. This means the business will be evaluated when lenders decide if they want to make a loan. These types of loans generally come with stricter lending requirements.
Personal loans are taken out by anybody for nearly any use, including small business needs. A personal loan application, however, evaluates the individual’s financial track record.
Let’s see when a personal loan makes sense for small businesses.
Are you open yet?
Some small business loans are only available to businesses in operation. Some lenders
might consider a well-developed business plan, but others won’t. On the other hand, personal loans can be taken out even if you are still in the development phase.
Do you have employees?
Proof that you can hire and retain staff means a lot to small business lenders. This transmits responsibility and revenue coming in. But some small businesses are initially run by individuals. If this is the case, a personal loan might be your best bet.
What’s your revenue stream?
For many small business lenders, you need to have revenue of at least $100,000 before they consider you for a loan. You might find some lenders that don’t have this requirement, but most will ask about how much you make. You may find more flexibility in applying for a personal loan instead.
Need cash fast or in small amounts
In some cases, you simply need a quick cash infusion to bridge a gap. For example, in order to pay for supplies, you might take out a loan until you receive payment for services. In well-defined cases like these, you could even use a credit card. But make sure you’ll be able to pay off the balance in full to avoid high credit card interest rates.
Many personal lenders make decisions in a matter of days. Some can even have the cash released within a week of your application. In a pinch, this type of personal loan might be just what your small business needs.
When small business loans make sense
If your small business has already been open for a year or two, then you have a great advantage. Also, if you’ve already taken out some small business loans, and made payments, this helps your credit score and chances for approval. Finally, a well drafted business plan that’s already seeing traction might be the icing on the cake.
In this case, even traditional bank loans might be available to you.
Do your homework
Don’t forget, both personal and small business loans charge interest and fees. Read the small print and make comparisons. One type of loan is not automatically better than the other.
Credible is a multi-lender marketplace where lenders including Avant, LendingClub, Prosper and Upstart compete for your business. You can compare personal loan offers from multiple lenders without sharing your personal information with lenders or affecting your credit score. Vincent Chough is a writer who earned his medical degree from the University of Pittsburgh School of Medicine and practiced in the U.S. for 10 years. He now lives in Argentina, where he’s involved in NGO management at the executive level.