Let’s face it; all businesses will need external capital at some point or the other. It’s just how things work: you need money to make money.
Many business owners decide to apply for a personal loan instead of a small business loan. But why? Is it really a better option?
Yes, persona loans can indeed be easier to be approved for. At least when you compare them with the requirements and applications the SBA, banks, and credit unions usually have.
Does that mean your only option is to use a personal loan for business purposes?
While a personal loan can be used to pay for business expenses, it might not always be the best option.
Fortunately for you, there are other alternatives out there.
In this article, you’ll learn if you should use the funds from a personal loan in a business venture. We’ll also list what other options you have.
|Table of contents|
|1. What’s the difference between a personal loan and a business loan?|
|2. Using a personal loan for business purposes: analysis|
|3. Personal loans vs. other alternatives: comparison|
|4. Your Best Alternative: Camino Financial|
What’s the difference between a personal loan and a business loan?
1. Use of the funds
It can be used to buy inventory, pay your employees, purchase capital equipment, or cover the costs of a marketing campaign. The money must be spent in a manner that benefits your business.
It can be used for practically any purpose. You can use it to pay for a holiday or make the down payment on your car. You can also use it for your business.
2. Requirements and Documentation
Broadly speaking, a business loan has more requirements than a personal loan because the lender is underwriting the business and the individual. Your lender will require, at least, to check your credit, to review your business bank activity, and to have proof of your business registration. The same goes with the paperwork and the number of documents needed to approve your application; that can be many depending on the lender you approach.
But have in mind that business loan requirements vary broadly from lender to lender, as well as the number of documents you’ll need to prepare. Some lenders are more flexible than others. For example, alternative lenders like Camino Financial only require nine months in operation instead of the usual two years for most lenders. And they require practically half the amount of documents than most lenders. Need to know more?
Most common business loan requirements
While in some cases, your lender may just need to review your credit report and check your pay stubs, they may request more documents (like financial statements) for larger amounts. The rule of thumb is the larger and cheaper the loan; the more documents will be requested.
3. Process and approval
The lender will carry out a detailed credit appraisal and arrive at a decision based on your company’s strengths. While banks and other traditional financial institutions may take weeks or even months to approve your loan, lenders like Camino Financial are a popular alternative for the easy and quick process. You could receive your funds within 5 to 10 business days.
The approval process for a personal loan is usually much faster than in most traditional business loans. You could receive funds in a few days if your application is approved.
4. Credit score
Lenders of both business loans and personal loans will check your personal credit score. A business loan lender may also check your business credit score.
All business loans require a personal guarantee, but this is considered a pretty weak form of collateral since it would require the lender to go to court to seize the borrower’s assets. In this sense, your personal assets are more protected than with a personal loan. Also, many business loans require you to put up collateral in the form of business assets. Of course, some specific types of business loans, notably invoice financing and merchant cash advances, don’t need collateral. Don’t forget that alternative lenders like Camino Financial don’t require collateral either.
Contrary to popular belief, not all personal loans are unsecured (“collateral-free”). Some of them require you to put collateral as well: a mortgage is a classic example (being your home the asset that works as collateral).
6. Loan amount
The amount you can borrow is based on the lender’s judgment of your company’s ability to repay. This will depend upon your cash flow, your business credit history, and your profitability.
Business loans amounts range widely: they can be as small as $5,000 and go up to hundreds of thousands of dollars or even millions of dollars (SBA loans are available for sums up to $5.5 million). So if you need a large amount of capital, definitely a business loan is your best option.
Lenders could impose a far lower limit. Most cap lending at $40,000, although it is possible to obtain approvals for higher sums. The average amount in a personal loan is about $8,000.
Using a personal loan for business purposes: analysis
Let’s look at the advantages first:
- Less paperwork. Personal loans usually involve minimal documentation. You don’t need to provide your company balance sheet or your business plan. A lender could offer a personal loan based on your credit history and your income (again, remember that those are also the requirements for some business loans like those offered in Camino Financial).
- Lower rate of interest. While it’s true that SBA loans and some traditional bank loans for business are available at rock-bottom rates, this isn’t true for all business loans. Some online lenders could charge interest rates that are as high as 100%! Personal loans, on the other hand, are generally available at between 10% and 36%. Using a personal loan for business could help you to lower your interest cost. If you have poor business credit, a personal loan could be a much cheaper option.
- Quick approval. It doesn’t take much time to get approval for a personal loan. If you meet the lender’s personal loan requirements, the entire process could take just a few hours! If your venture needs funds urgently, the speed of approval could be crucial. With that said, some business loans can also be super fast to get. With Camino Financial, you can be approved as soon as 2 to 4 days.
- Available to businesses that can’t get a business loan. Most small business lenders don’t advance funds to startups or companies that have been in existence for a short period of time. If you fall in this category, using a personal loan for business could be a good option.
At Camino Financial, we only require 9 months in operations instead of the 2 years required by most commercial lenders.
Now, let’s look at the disadvantages of using a personal loan for your business:
- There’s a limit to the amount that you can raise. Business loans could be for large sums (like up to $500,000). Personal loans, on the other hand, are typically limited to $50,000.
- It doesn’t help to build your business credit. A personal loan doesn’t impact your business credit score at all. It will only affect your personal credit. This will prevent your venture from establishing its credit history.
- You’re mixing up your personal and business expenses. It’s NEVER a good idea to mix your personal and business expenses. This can create accounting and tax issues. Additionally, when you apply for a business loan, the prospective lender would see a bank statement that includes both personal and business expenses. This would create a poor impression. This practice is known as commingling.
- The amount that you can raise is decided by your income level, not the potential of your business. Remember that the amount in a personal loan is determined by your income level and not your business needs. So, if you come across a lucrative business opportunity that requires an investment that exceeds what your income justifies, a personal loan may not be of much help.
Personal loans vs. other alternatives: comparison
|Personal loans||Business credit card||Bank business loans||Camino Financial business loans|
|Amount||$1,000 – $50,000||$2,000 – $225,000||$100,000 – $1,000,000||$5,000 – $400,000|
|Interest Rate||5 – 36%||13 – 24% +fees||3 – 6%||12 – 40%|
Business Credit Cards
A business credit card could provide you with the cash that you need.
Entrepreneurs make extensive use of this form of financing. A recent report points out that 13.9 million credit cards are used by small businesses in the United States. The best business credit card issuers offer a range of benefits. It is advisable to choose your card carefully and pick one that will prove the most useful for your business.
The thing with credit cards is that they’re not as easy to be approved for either: they also require great credit scores, and sometimes they have pretty hefty interest rates.
But for many entrepreneurs who need money urgently, there are still other options.
Camino Financial Small Business Loans
If your business needs a cash infusion, consider taking a business loan from Camino Financial.
Our loans vary from $5,000 to $400,000.
We are more flexible than traditional lenders like banks since, to approve your loan, we mainly consider your personal credit and global cash flows of your business. Also, funds from our loans can be used to pay off personal loans or credit cards that had been utilized for business purposes. You can even use the loan to purchase a second business.
Camino Financial is open to extending finance to borrowers with no credit history, and we don’t ask for collateral.
Even better yet, if you don’t have an SSN, you can apply with your ITIN!
To apply for a loan with Camino, you should generate sales of $30,000 annually or $2,500 a month, a much lower amount than the one required by other lenders, and your company must have been operating fur just 9 months. That’s much less than the 2 years that most lenders require!
Your Best Alternative: Camino Financial
At Camino Financial, we offer small business loans that cater to your specific needs.
To us, you are our priority, and we want to see your business grow and succeed. Our guiding principle is our motto, “No business left behind,” which infuses everything we do.
With us, you’re like family!
Let’s become financial partners and make your small business grow!