Should you opt for a business or personal loan to fund your venture?
Funding a business that has no track record and financial via traditional finance sources is very difficult. In this article we'll take a look at what it takes to fund a business using a personal loan versus the traditional business loan.
In an economy where the unemployment rate is shockingly high, more and more people are being forced to take their future into their own hands. This results in people creating their own work opportunities by starting their own businesses.
Starting a business is a grand and exciting venture and offers many amazing opportunities for yourself and your future employees, however, formulating an awesome business plan is only half the battle won. The other half, which is often a much more difficult battle, is to get the financial capital needed to start and kick off a new business venture.
There are two commonly known ways to finance your new business, either get others to invest capital into your venture or secure finance from a credit provider.
When we look at approaching a credit provider the most obvious choice option would be to apply for a business loan - after all, that is the purpose of a business loan, to help finance a new business.
Benefits to applying for a business loan
Money is lent to the business entity
When you take out a business loan, the money is lent to the business entity itself and not the individual owner - therefore, if the loan cannot be repaid your personal credit is not affected. This is the case unless the business is a sole proprietorship, a CC or partnership where the individual retain personal liability for the debts of the business.
Bigger loan amounts
Business loans enable businesses to borrow larger sums of money at reasonable interest rates over a specific period of time. This is not a revolving line of credit and you cannot redraw money your repay on the loan. There are also a range of other forms of business finance that can be tailored to suit the needs of your business based on it's individual cash flow.
Improve your credit score & access more credit
Like with any line of credit offered, when given and paid back promptly it increases the credit rating of that person or business. A history of repayment on loans will allow your business to access larger sums of credit in future.
Accessible with competitive rates
There are plenty of credit providers that are willing and able to provide business loans, you can easily leverage competing offers and go for the option with the best rates and terms.
Alternative sources of funding in South Africa
All large corporations in South Africa are required to spend a certain amount on Enterprise Development. This has resulted in these corporations establishing various finds that are aimed at financing South African businesses. These funds generally provide interest free loans to entrepreneurs that meet their lending criteria.
There are many benefits to getting a business loan, however, it is much easier for established businesses and those with assets they can place as security to obtain and maximise these flexible loans.
Not to fear, an alternative option exists for new start-up businesses with no history or assets that can be leveraged as collateral.
Personal loans for funding a business
This alternative comes in the shape of a personal loan as there are no restrictions or limitations on what a personal loan can be used for. A personal loan is an alternative option to a business loan and a relatively good one at that, here is why:
It’s easy to qualify for a personal loan
Qualifying for a personal loan is considerably easier than qualifying for a business loan. The requirements are less strict and the loaning criteria easier to meet. This is likely to be your best option if you're business is relatively informal and you cannot provide a detailed financial history.
That being said, you must remember that taking out a personal loan to fund a business may very well put you at risk. If you're business does not generate cash flow and turn a profit you may be unable to make the repayments on your loan and end up blacklisted as a result.
Since we know that there is rarely any reward without risk, getting your business off the ground may very well be worth the risk to your personal credit.
Fast personal loan approval
Lenders tend to disburse funds for a personal loan much faster than they do for business loans, which provides you with faster access to funds.
No collateral required for smaller loans
Your approval for a personal loan is not dependent on your ability to provide security for a loan, instead, it relies on your personal affordability and creditworthiness. In the name of full disclosure it is imperative to note that there are downsides to using a personal loan to fund a business.
Risks of using a personal loan to fund a business
Risking your personal credit
As mentioned, when you obtain a business loan and the business goes bankrupt, your personal credit will not be affected. With a personal loan the opposite is true. Your personal credit rating is on the line, should the business go bankrupt and you are unable to repay the loan.
Limits on how much you can borrow
Personal loan amount limits can be much lower than those afforded on business loans, therefore, you may not have all the capital you require to start your business.
Higher interest rate
The interest rates on personal loans, although they depend on your creditworthiness, are generally much higher than the interest rates offered on business loans.
There are definite pros and cons to both options when it comes to financing a business venture, however, it’s important to note that multiple options exist and when one fails the other may well succeed. Be sure to remember to compare loan options for both personal and business loans on a reputable loan comparison site to ensure you get the best offer available to you.