Starting a new business presents its own challenges and complications, let alone trying to secure funding in order to make that dream a reality.
Many people remain uncertain as to whether or not they should use a personal loan or a business loan to start or purchase a business, and what the best position for them might be before they set off on their venture.
Can I use a personal loan to start a business?
Many start-up businesses with limited or no trading history could struggle to get a business loan as they would not meet the eligibility criteria, which is why they may opt to get a personal loan instead.
It is possible to use some personal loans to fund a new or existing business. However, you must ensure to check with your lender first to make sure that it doesn’t impose any restrictions on using that personal loan for business purposes.
If you’re unsure whether or not a lender will allow you to use a personal loan for business use, you should ensure to be honest about your intentions when discussing the loan, so that the lender is aware of where they stand. Most lenders will normally categorically state what the personal loan can and can’t be used for.
Some lenders will allow commercial uses while others may not, so it is important to check this before you proceed. Check the small print or, if you are still unclear, ask the lender if you can you use a personal loan for a business. This alleviates the risk of you being in breach of your loan terms and having to repay the loan sum and resultant interest immediately.
Is it better to use a personal loan?
Whether or not it’s better to use a personal loan for business purposes depends on a variety of factors, such as the type of business you have, and whether you’re comfortable being personally liable for the loan.
Unlike a business loan, a personal loan is paid to you as an individual. So, lenders will assess your eligibility based on your personal credit score and your personal financial situation (such as your income) and not your business finances.
Because a personal loan would be in your name as opposed to your business’, you would be personally liable for paying it back regardless of how your business performs. You would therefore need to be prepared to take this risk and ensure you can afford to make the repayments so that this doesn’t damage your personal credit rating.
In some ways, personal loans can be useful ways to fund your business if you only need a small amount of funding, because applications can often be completed and approved relatively quickly.
When deciding whether to apply for a personal loan or business loan, you will need to consider your own financial state as well as that of your business. It is important to spend some time researching different lending options so that you can find the one most suitable for you
What is a business loan and how does it work?
Much like a personal loan, a business loan is a loan you can take out to support your business.
Many lenders offer business loans and they work in a similar manner to a personal loan. When applying for the loan you will normally need to explain to the lender why the loan is required and what it is going to be used for. Lenders will need to assess your income and how you plan to repay the loan.
You can choose how long to take the loan out for, and will usually repay this over a period of 1-30 years, depending on what term you end up choosing. Once approved you will then pay the loan back in instalments with interest.
Unsecured Loans v Secured Loans
There are two main types of business loans:
- Unsecured; and
Unsecured loans enable businesses to simply borrow money without having to use business assets as a form of security.
Secured loans normally require the borrowing business to use its assets as a form of security, in exchange for the lender providing the loan. This means that if repayments are not made, the lender would have the right to sell the assets of the business to recover its losses.
It is important to note however that not all business loans are the same and spending some time finding the right one for your situation is essential.
How much can I borrow with a Business Loan?
This varies depending on your individual circumstances, such as your business’ situation, credit rating, the type of business loan you’re getting and how long you want the term to be. Business loans can typically range from £1,000 up to £3million.
Start Up Loan – Backed by the Government
One type of loan that can be used for business purposes is the government-backed Start Up Loan. Although they are targeted at businesses, and unlike a business loan, this is an unsecured personal loan provided by the Government, and is designed to help new businesses access funding.
It can be used for a variety of business projects such as marketing or for buying stock and/or equipment. Businesses can apply for loans of different sizes up to £25,000 over different terms, and they can also access extra mentoring and support as they grow their business.
On application, you would need to provide details about your business and how you intend to use the loan for it. However, as with a personal loan you would also need to pass a credit check to prove that you can afford to make the repayments, even if your business operations don’t end up going as planned.
Whether you choose to take out a personal loan or a business loan, taking out a loan of any type carries its own risks and it is important to consider that while you are making sure that you can afford the repayments, you have also considered what you would do if your financial circumstances ever changed.
Farleys’ Corporate team are available to advise on all of the legal aspects of your business, from start-up to sale. We can also point you in the right direction for financial advice from experts in the field. To speak to one of our corporate law specialists, please call 0845 287 0939 or contact us by email.