Should You Use a Personal Loan for Your Startup?

Launching a startup is a huge feat. From managing product ideation and material logistics to securing permit documents, there are many things to consider before establishing your startup. Despite the challenges, new startups in the UK alone reached 665,495 in number in 2020, with as many as 65% of adults interviewed online noting that they were interested in starting their businesses. Even with a comprehensive business plan, one of the primary problems small businesses face is the lack of finances.

Fortunately, there are multiple funding options available for startups, with most businesses applying for either a business loan or a personal loan. While a personal loan is usually provided to individuals, it’s possible to use it to support your business growth.

Availing personal loans for startups

Given the difficulties faced by small businesses, it’s unsurprising that as much as 35% of owners rely on personal finances to keep their businesses afloat, as noted in a report on small businesses by CNBC. Loans have also been an integral part of maintaining a business, especially personal loans, which are typically easier to secure than other financing types. Business loans often require lenders to provide their annual cash flow and trading history, making securing a loan especially difficult for startups with limited or no track record. In comparison, personal loans depend on an individual’s creditworthiness and unique financial situation rather than your business history, making the loan easier to qualify for.

Before applying for a personal loan, you must check if a lender allows the loan to be used for business purposes. Furthermore, Sound Dollar’s tips on applying for a personal loan note that these can be expensive; among popular lenders, rates can go as high as 36%, which is much higher than regular credit card interest rates. It’s also essential to take the time to shop around and compare multiple personal loan offers before applying to ensure you’re getting the best deal.
Choosing alternative funding instead
While personal loans are quick to secure, they often come with less capital for your startup. Furthermore, there is a greater liability with personal loans. Regardless of your startup’s success, falling behind on your payments can negatively affect your credit score, and you may have a more challenging time securing loans for other purposes. On the other hand, business loans not only offer bigger loans, but some lenders may provide additional merchant services such as processing customer ACH payments which can improve your customer service. Business loans also enable you to establish collateral such as your equipment, invoices, real estate, and other business assets, which encourages a lender to provide you with lower interest rates than unsecured loans.

Aside from a business loan, you can try securing other forms of funding. As shared in our post “What Do Investors Look for in a StartUp?”, if your business has strategic advantages and is passionate about the product, you may potentially secure a good outside investment through venture capital investors who can help jumpstart your progress. Similarly, you can also obtain crowdfunding through websites like Kickstarter. You can also consider your startup’s eligibility for government grants, which can provide valuable funding when you have difficulties securing a loan.

Personal loans are a great way to cover the starting expenses of your business. Ultimately, it all comes down to whether you’re willing to put your personal credit on the line for your dreams. If you’re not sure what type of funding you’d like to take, you can always inquire with your lender about your options.