It’s not unusual for small business owners to use their own money or take out a personal loan to fund their business. While there’s nothing wrong with this, there are many reasons why taking out a business loan is often the better option.
What are the pros of funding my business with a personal loan?
Personal loans are usually easier to get than business loans, but that doesn’t necessarily mean you should fund your business this way. While the benefit of a personal loan is that you can use it for anything you want, you should have a specific use in mind before you apply for personal finance. Otherwise, you may struggle to earn enough money to pay the loan back and this could damage your personal credit score.
Pros of a personal loan:
- You can use a personal loan for anything you want
- They are faster to apply for than business loans
- You may be able to get a great competitive rate
- Most personal loans don’t require you to put up any collateral
Cons of a personal loan:
- You are personally responsible for paying back your loan
- Failure to pay could hurt your credit history
- Should your business fail you still have to pay off your loan
Should I fund my business with my personal savings?
Some people are scared to take out a business loan and instead opt to fund their business using their savings. Business owners should think carefully before spending too much of their savings in this way. You still need emergency savings to fall back on should anything in your personal life go wrong.
Pros of using personal savings:
- You’ll avoid going into debt
- Once you have the money saved you are good to go
- No repayment plans
- Reduce your liquidity as a business
Cons of using personal savings:
- Takes a long time to save. You could miss out on opportunities during this time
- Spending too much of your savings could put your personal finances at risk
- No safety net if the business fails, you lose your investment along with it
- Your growth is limited by how much savings you can put aside
Should I fund my business with a business loan?
If you’re in business, it’s always advantageous to keep your personal and professional finances separate. A personal loan may be easy to get, but your personal finances will be at risk should anything go wrong with your business.
Pros of a business loan:
- It keeps your business and personal finances separate
- Business finance can be tax efficient. Interest can be claimed as a deduction
- Using lending to purchase an asset won’t affect your liquidity
- You are not personally responsible for paying the loan back – your business is
- It’s easier to organize your finances and calculate your business taxes
- Any loan repayments are tied to your business which helps to build up credit
Cons of a business loan:
- Banks can take a long time to approve
- You’ll need the right paperwork and history
The ins and outs of applying for a business loan
Many people default on taking out a personal loan because they think it is easier than applying for business lending. Traditional lenders, like banks, do have stricter lending policies for business loans and usually want to see:
- Financial statements, preferably from an accountant
- Proof of your individual income
- Bank statements
- Identification
- Your credit score, and
- A pitch of your business
Getting funding at the right time is so important to the growth of any business. Unfortunately, banks generally require a lot of paperwork before they can process your loan application and it can take them a long time to approve your application.
For these reasons, more Australian businesses are turning to alternative lenders for business financing. There are many pros to using an alternative lender. They have fast turnaround times, can offer unsecured financing, require less paperwork, and generally make the process of applying for a business loan easily.
At ThinkCap, we work with over 75 lenders to find the right financial solution for our clients. We go beyond commercial loans and act as your strategic partner, helping you to secure your future and grow your business. Apply now for a business loan.
