If your business is just starting out, it can sometimes be difficult to secure funding from traditional lenders.
Business loans typically come with requirements that, as a startup, your business may fail to qualify for. However, some personal loans have restrictions on whether or not you can use them for business purposes. It can be hard to know which option to go for.
Don’t worry. We’re here to guide you through all you need to know to help you decide whether a business loan or a personal loan is right for your start-up.
The biggest issue when it comes to start-ups and business loans is the eligibility criteria. Business loans, like all loans, are given based on affordability and a credit check. The challenge for a start-up business is that they have no proven track record and no credit history as yet. Which makes accessing funding that bit harder.
However, there are business loans available for startups. For most of them you will need to provide a business plan and a cash flow forecast as part of the application process.
While eligibility and access may be a downside to choosing a business loan for your start-up, there are advantages to going down the business loan route:
- They typically allow you to borrow a larger amount than a personal loan. If you are trying to get your business out of the starting blocks, this could be a distinct advantage.
- They are specifically created for business users and have a range of different financing options. You may find a merchant cash advance or invoice financing will suit your funding needs better than a traditional loan.
- They typically come with some sort of support. While personal loan lenders aren’t typically interested in what you do with the money as long as you repay it, with a business loan, support is often an essential part of the service – especially when it comes to small businesses or startups with little experience.
- Taking out a business loan means that your business name can start building its own credit history, which could make accessing additional funding easier in the future.
A personal loan is just that, personal. So the largest issue that you may come across if you are considering taking one out to fund your startup is that some lenders specify that the loan should be for personal use only. And if you are found to have used it for business purposes, the lender may call in the loan and demand you repay it in full straight away.
However, if you do find a lender that will allow you to use a personal loan for business, the big advantage is that you won’t have to provide information regarding the state of your business. The application will therefore be less involved than if you chose to apply for a business loan.
Accessibility is one of the few advantages that personal loans have over business loans when funding your startup. Here are a few of the disadvantages you should also bear in mind:
- You, the individual, will be personally liable for the loan. As it is a personal loan, it will be your name and your credit history that will be taken into account, not the business’s. And it will be your credit rating that is impacted if the business is unable to repay the loan.
- Personal loans are typically smaller than business loans. If you are looking for a larger injection of cash, it may be better to consider other funding options.
- There is less support when it comes to a personal loan. With a business loan you can expect some sort of mentoring or advice as part of the package, but if you are taking out a personal loan this is unlikely to come as part of the service.
If a business loan or a personal loan doesn’t feel like the right fit, maybe consider a startup loan. This is a government-backed personal loan available to individuals looking to start or grow a business.
The loan is unsecured, and amounts range from £500 to £25,000. All owners or partners can individually apply for up to £25,000 each, with a maximum of £100,000 available per business. In addition to the finance, successful applicants will also receive 12-months of free mentoring.
As part of the process, you, as an individual, will be required to have a credit check and there will be a personal affordability check undertaken before your application is approved. In addition to that, you will be required to provide a business plan and cash flow forecast. However, if you are new to this, you can find free templates and guides at the startuploans.co.uk website.
The post Business loan vs personal loan: which is better for your startup? appeared first on The Motley Fool UK.
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