6 Pros And Cons Of Using A Personal Loan For Business

Running a business in this era can be quite tricky, considering how markets can tend to be competitive. In case of any monetary shortcomings, a business might have to resort to alternate financial funding streams.

One of the common ones includes personal loans. Personal loans are a type of installment loan. The lender or bank allows the applicant applying for a loan to pay back the loan in regular monthly installments over time. This period typically ranges between two to five years as per terms, and at max can be up to seven years. The interest rate is fixed throughout the life of the loan.

Personal loans could be used for several purposes. The company might consider expanding the operations of the business based on the current network it is operating on. When it comes to surviving in the market, unforeseeable situations could lead to impulsive choices made by the company. Another viable option can be credit union as it gives an opportunity to get the loan on lower interest rates.

Inventory, plants, and machinery could also be purchased with loans being the source of finance, depending on the particular investment. Generally, it is comprehensive enough to understand that the financial position of the company will ensure strategic measures must be taken. Below are listed down some pros and cons you should consider before applying for a personal loan:

Pros:

Multipurpose loan

Personal loans can have several uses. Therefore a business applying for a personal loan would not need to limit itself to specific terms. The money lent can be invested anywhere instead of particular factors that might require specialized loans. A company might consider utilizing the loan for inventory purposes and even as a mortgage. The possibilities are endless.

No collateral 

An excellent benefit of a personal loan is that most banks and lenders have zero collateral policy. No valuable asset would have to be put forth and deposited beforehand. In an unlikely event of the borrower not being able to pay back the loan, none of the company’s assets would be seized against the nonpayment factor. This is also known as an ‘unsecured’ loan, which does not require the business or individual to submit anything or any certificate that holds almost equal value to the loan amount. Secured loans have a constant risk of losing more than anticipated due to the security deposit measures taken before the loan application.

Higher loan amounts could be lent relative to credit cards

While the typical personal loan amount ranges from $1500 to $100,000, credit cards are usually not able to facilitate such amounts. Credit cards are a form of revolving debt, which allows you to borrow for as long as you can pay off the minimum payment each month. These debts can be extended over some time, and the interest rates could vary accordingly. With personal loans, you can borrow more than a credit card, and you can also apply for smaller ones.

Reasonable rates 

The interest rates put forth in the terms are comparatively lower than credit cards. Creditworthy businesses and customers are charged at least 13% APR. However, it is likely for a company applying for a personal loan to be charged with a rate as low as 5% APR.

Longer payback period 

Other loans, such as payday loans, have shorter payback periods. Businesses in budget constrain often find themselves in an even more vulnerable situation. Considering that they are not able to pay back or resort to putting off the amount due with another loan. This could lead to a constant financial crisis and could ultimately declare the company to be bankrupt. Personal loans, on the other hand, give you an edge to pay back the loan in at least a year’s worth time. The monthly installments are convenient and manageable as the loan amount is broken down for your ease.

Keeps control of the company 

It is less likely for a business applying for a personal loan to discontinue its operations. Besides, it’s known that a bank would not loan business with poor company records. The current status and potential of the company would be assessed beforehand. This ensures minimum cases of businesses not being able to pay back the loans, and thus, the company sustenance remains manageable.

Cons:

Fixed payments 

With credit cards, you can take as long as you want to pay back the amount. In the case of personal loans, a company failing to pay off the amount due in the specific time frame would have to bear strict consequences. The lender or the bank could potentially seize the collateral deposited in a secured loan. An unsecured loan could result in the bank suing you for nonpayment charges. Therefore, without knowing the potential of your company’s future performance, a personal loan must not be preferred.

High-interest rates

Those who possess good credit can indeed apply for loans offered at lower rates. However, a company with low credit scores must also bear in mind that a personal loan could be costly. Personal loans could prove to be more expensive than credit card loans and even home equity loans. This is a major disadvantage for those with unimpressive credit.

Prepayment penalty 

Personal loans are most likely to bind you with their interest rates by preventing you from paying off the amount in full when you can afford it. Credit card loans, on the other hand, allow you to pay for the amount due to avoid monthly charges. Therefore, if a company wishes to clear off its debt fully, it is most likely that the bank would charge a prepayment penalty. This is done mainly to make up for the amount they won’t be able to gain with the lost interest charges.

Fake loan applications and scams 

Not all loans offered are genuine. Several scammers often put up false loan applications to steal your company’s personal data and information. Some schemes even adopt an advance fee scam. This allows scammers to charge a fee before the actual loan, and thus they disappear with the money.

Origination fee 

· An origination fee typically ranges from 1% to 6% of the loan amount. This is to account for the cost of processing the loan and must be paid back on the initial application of the loan. Origination fees cannot be included in the usual monthly installments and must be paid for immediately.

Tough to Qualify 

Banks are finicky when it comes to personal lending loans. Small businesses that are unable to deposit collateral or who possess poor credit scores will unlikely receive the loan. A lender might require a company’s performance record or even ask to put up a personal asset for seizure purposes in the event of default.

Final Word

While personal loans could prove to be purposeful, a company might also (potentially) lose more than anticipated. Therefore, it is always best to thoroughly evaluate the potential of your company before applying for a personal loan. Basic pros and cons must be considered beforehand to avoid or create any unlikely and vulnerable circumstances for the company. It is good to conduct a cost-benefit analysis and complete the feasibility of the project before applying for a personal loan for your business.

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