A personal loan is not the best source of business financing, but it can be a quick source of relief for a startup's financial needs. Here's how.

You’re thinking of starting or growing a mission-driven and conscious business, but you’re strapped for cash. You’re not sure whether you should use a personal loan or a business loan.

You already know that 30 percent of new businesses don’t make it to their second birthday. So, you’re really careful since you don’t want to be left grappling in debt.

You’re deeply passionate about the success of your business. You’re not just growing an ordinary business, but a conscious one that’s bound to bring social good.

Can you use personal loans for this? The answer is a big yes. Let’s start with the reason some entrepreneurs are turning to personal loans.

Why social entrepreneurs are turning to personal loans for business funding

Passion, discipline, and a strong work ethic are not everything you need to launch your dream business. There is a huge problem when it comes to funding.

Most venture capitalists only want to fund mature companies. It is easier to get angel investors and business loans for a business that is past the risky startup phase.

So, what are you supposed to do if you have a burning mission-driven idea that could change the world but do not have the funds needed to start it? Can you use a personal loan instead? Yes, you can.

A personal loan is free of most of the restrictions that accompany a business loan. You can, therefore, use money from a personal loan to deal with any business need. For instance, you can use the funds to pay off business expenses or to expand your product line.

When can you use a personal loan to finance a conscious-minded business?

Most personal loans are unsecured installment loans with fixed repayment periods. You might not need to put up any collateral for the loan.

The annual percentage rates for unsecured loans are high but could be at par with some business loan interest rates. Personal loans are a better option than online business loans, which could have higher APRs.

It is much easier to get a personal loan than it is to get a business loan. Personal loans have less stringent lending requirements, and all you need to show is your credit history and personal finance records. You can, therefore, apply for a personal loan to:

  • launch a business when you do not have the extensive documentation required for business loans approvals.
  • access small amounts of money since banks avoid small business loans due to fewer yields.
  • access funds when you do not have collateral for a business loan and your home or car is not an option.

How should you use a personal loan to finance your business?

A personal loan can be a quick source of relief for a startup’s financial needs. However, it is not the best source of business financing.

First, it is crucial to separate your business’s finances from your finances. Combining both aspects is financially irresponsible, and it will not make your business loan approvals any more accessible in the future.

A personal loan will not leave any good credentials on your business’s credit history.

It is also very easy to jeopardize your family or personal assets with your personal finances tied to your business — should the business get in trouble. A default on the payments of a personal loan could bring about a lawsuit, which could put your finances at considerable risk.

Remember, you’re growing a conscious-minded business. Such high values should also be represented in your finance books.

So, the best way to use a personal loan in your mission-driven business is for startup financial needs. After that, you can grow your business and let it get its own business loans.

Factors to consider when getting personal loans for your business

Every credit union or bank that issues personal loans has its lending rules. Some may restrict the use of personal credit in business. Therefore, you must shop around first and take note of factors such as:

  • lending limits
  • loan fees and annual percentage rates
  • minimum credit score needed to qualify for a loan
  • the personal loan’s repayment terms
  • funding speed
  • collateral, if any

The rule of thumb, when it comes to loans, is only to borrow what you need. This will not only reduce your interest payments but will reduce the chances of a default. Start with a personal loan if you’re in dire need. Then work hard and grow your social enterprise one step at a time.

Thomas Cappetto

Thomas Cappetto is the director of public relations at Crediful, your guide to everything personal finance. When he is not fine-tuning communication within Crediful and connecting with other blogs, he enjoys long walks on the beach with his wife Shelly and their two sons Johnathan and Alexander.

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