Home Loans Business Pros and Cons of financing Business with Personal Loan

Pros and Cons of financing Business with Personal Loan

Personal loans are a good source of acquiring finance for your business start-up or expansion. Advantages of personal loan are that these are used for overcoming financial difficulty, no collateral required, ownership remains intact and provides you money quickly. There are some disadvantages involved such as repayment issues and higher rates of interest charged.

You must always have capital for expanding your business activity. It is risky to mortgage your business assets each time when you need money. And instead of utilizing your personal funds, it is good idea to avail personal loan for the business.

Let us study the pros and cons of financing your business with personal loans.

Pros of financing business with personal loans

If you are facing any financial crisis in your company and need funds urgently, then you can go for personal loan. You will be required to submit your personal documents such as income statements, nature of business and identity proofs, and get loan accordingly. Obviously, you need to have a good credit standing. If you are availing loan from a bank or an institution, your ownership status will not be affected at all. Most importantly, you are not supposed to provide any collateral. In most of the business loans, banks demand collateral security such as machinery, etc. But this is not applicable for personal loans.

Banks will not ask you how you are going to utilize the loan amount. It can be for your personal expenses or for business. So, you can properly utilize your loan amount for your business, whether it is repayment of a debt or purchase of any new equipment. Personal loans do not require compulsory and lengthy documentation process. If your documentation is perfect and credit report is alright, then your personal loan will be approved quickly.

Cons of financing business with personal loans

You must timely repay the loan. For better accounting purpose, you can club the personal loan acquired into your business books of accountancy. If your business is running well to pay the EMIs of the loan, then you are at an advantage. But if you are already suffering from business losses and are planning to repay the personal loan from your monthly income, then it is an issue for you.

Remember that for personal loan repayment, you are responsible and not the business. The bank will approach you if there is any discrepancy in the EMI repayments. Some banks also ask for collateral since you are not in fixed employment. Your income reflects the business revenues. If your business is running in an inefficient manner, then bank may charge higher rates of interest from you. Your credit rating is affected by non-repayment of personal loans. So, in future, if you actually need money for personal need, then the bank may think twice before approving it.

Thus, it finally depends on your planning and careful action whether personal loans are advantageous or not for financing your business. You must properly analyze your business profits in future and try to repay it from the business income itself.

3 COMMENTS

Shraddha November 4, 2015 at 1:03 pm

Personal loan can be a good option for businesses but there are disadvantages as well. So before taking personal loan for your business, you need to figure out the pros and cons so that at a later stage you do not land up into any kind of trouble. Always keep aside part of your profits so that it is put to use on a rainy day.
Kitty Macalpine February 13, 2016 at 3:10 am

It’s a big risk to finance business with a personal loan and may end badly. Sometimes, though, we don’t have any choice. Financial crises need good analysis for the best option to solving your problems, so you can support your business and not just apply and “bandaid” solution that will results in tears in the long run.
Vandana Agarwal July 1, 2016 at 7:34 pm

Personal loans to finance the business is a good option than the other types available. Excepting for the interest rate which is higher. The bank does not ask for any security or collateral if the credit rating is good. The ownership is retained unlike in other types of loans.