Whether you are trying to raise money to breathe life into your startup idea or you are looking for a short-term bridge loan to pay a bill for your business, you are going to find yourself in need of additional financing more than a few times. The problem, however, is that a bank that is willing to lend you a small business loan from or an investor who’s willing to back you can be very hard to find, especially when you are starting out or when your business is short in cash. Instead, some people have been turning to personal loans to finance their startups. But is this really a creative and good way of funding your business? Here, we discuss the advantages and disadvantages to consider before moving forward.
Advantage of getting personal loans for your business
A personal loan has a few distinct characteristics that might be helpful for a budding enterpreneur. First, it's easier to secure than a small business loan. Often times, a bank requires a concrete business plan and financial statements before making a SME loan. The problem is that you won't have these to convince the bank as a startup owner that is just beginning his journey. Instead, banks typically only require your personal information to make a personal loan. This easy access could make it more advantageous for those who are starting out than getting a SME loan or an investment from an angel investor, especially if you want a small amount that you can repay gradually overtime in order to fully flesh out your idea.
The second advantage is that personal loans are readily available. Once you apply, some many banks will provide you with an approval and the fund within 24 hours. On the other hand, banks can take up to 2 weeks to process your application. Speed can be of absolute importance when it comes to running a small business, especially when you need to pay your bills but also have yet to collect your receivables. Not paying your bills on time because you don't have hard cash on hand can have devastating effects on your business, even if you know you will be receiving an even larger payment from your customers at a later date.
Pitfalls of using personal loans for your company
While a personal loan can help your business in meaningful ways, but it also has its own downfalls. First and foremost, personal loans tend to have higher interest rates than most other source of funding available to a business owner, especially those available from commercial banks. However, from what we can tell, some of the best personal loans are still cheaper than many of the online SME lending platforms available in Singapore, which tend to charge at least 12-16% of annual interest.
However, this is not the biggest disadvantage of getting a personal loan for your company. Instead, the biggest pitfall you should be wary of is that you as the borrower will be personally responsible for the debt. This means that defaulting on a personal loan will hurt your personal credit score as well as cause other problems for your personal life. In contrast, a small business loan can only be made to the company itself; defaulting on it could bankrupt your company, but it protects your personal assets from being seized by your lender.
Another potential problem is the fact that personal loans usually come with a maximum borrowing limit of S$200,000, while small business loans can be as big as S$500,000.
Alternatives to personal loans and SME loans
Using a personal loan to finance your business could be a good idea for business owners who have good credit and don’t require a lot of money. Otherwise, as a person without the ability to comfortably payoff the said amount in case things don't work out, the risk of burdening yourself with a loan that can potentially impact your personal life can be overwhelmingly large.
Also, if you can't find banks or investors to provide you with a small business loan or investment, you still have other alternative sources of funding. For one, there are many crowdfunding platforms like Funding Societies, KickStarter, GoGetFunding and FundedHere that can provide you with various kinds of capital (loan, pre-purchase, donations, equity investments) quite quickly. At the end of the day, the most important is that you shop around and consider a variety of different options so that you get the best kind of financing with the terms, structure and costs that work for you so that you can continue to grow your business.