Personal loans are the fastest-growing consumer lending product. The total personal loan value has reached record highs of $120 billion. This is only set to grow even more with record-low interest rates.
If your business is struggling, it can be tough to find a lender willing to work with you. This may lead you to consider a personal loan to fund the business instead. If you have a strong credit score and the ability to get approved, this can seem like a viable alternative solution.
But is it a good idea to get a personal loan to fund your struggling business? Keep reading to learn more.
Can You Use a Personal Loan for Your Business?
The short answer is yes; you can take out a personal loan for business. You just need to confirm that there are no limits in your loan terms that prevent this.
The real question you need to ask is not can, but should you use a personal loan for business.
Should You Take out a Personal Loan for Business Use?
Using a personal loan for your business should be a last resort option. There are several reasons why even taking out a small loan is a terrible idea.
First, obtaining financing this way puts both your business and your personal finances at risk. What happens if the business goes under? You still owe the personal loan. Now you have no business and a mountain of debt.
Second, using a personal loan to fund your business effectively mixes your personal and business finances. This is a huge no-no. It can put your entire personal asset portfolio at risk. Should anyone file a lawsuit against you for some reason, they can bring in your personal assets because you’ve already mixed the two.
When to Avoid the Personal Loan
There are several principles of personal finance that you can apply to your business during a rough patch. These principles can help you manage your business finances better and potentially not need any financing to survive.
Take a look at your income statements and trim your expenses. You don’t want to spend more than the business earns. It can also help to plan your budget.
That way, you know what you need to spend to survive in the coming months.
When to Consider a Personal Loan for Your Business
There are certain circumstances when a personal loan may be the best option. If your business hasn’t been open long enough or doesn’t have a strong enough cash flow, it won’t get approved for a loan.
Another common situation is where the amount you need is relatively small, but you can’t afford the high-interest rate imposed. Or perhaps you’re worried about the required collateral needed for the business loan.
In these circumstances, you can get a personal loan that doesn’t require collateral and has a more favorable interest rate.
Is It a Good Idea to Get a Personal Loan?
So, is it a good idea to get a personal loan? The answer can change. While anyone that can get approved can get a personal loan for their business, not everyone should.
Consider your current personal and business financial situation and history to determine which type of loan is the best option.
Browse the business section of our blog for more helpful articles on managing your business.
Interesting related article: “What is a Personal Loan?”