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By: rkapur
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Should You Use a Personal Loan for Business Purposes?

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If your company needs a cash infusion, it’s logical to start looking for a small business loan. Your first option would be to turn to a bank or a credit union with financial products specifically designed to cater to your business needs. But let’s be honest: getting your business loan application approved may not be easy. Strict requirements and complicated paperwork make this option more viable for well-established companies with consistent cash flows and a growing customer base.

A large number of ventures don’t fall into this category: young businesses, small firms that are struggling to grow their business and even those companies that have been in existence for some time but which don’t meet the credit requirements of traditional lenders.

In cases like these, there is another option: to take a personal loan for business purposes.

Yes, you read that right. A personal loan can be used to pay for business expenses. But why should anyone deploy the funds from a personal loan in a business venture?

To answer this question, let’s first understand the difference between the two types of funding.

 

What’s the difference between a personal loan and a business loan?

 1. Use of the funds

Business loan: 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.

Personal loan: 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

Business loan: 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. 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 loans 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, as opposed to the usual two years for most lenders. And they require practically half the amount of documents than most lenders. Need to know more?

Check here the most common business loan requirements and how they compare to those in Camino Financial

Access here a complete checklist of documents required by most lenders and how they compare to those in Camino Financial

Personal loan: 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

Business loan: 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.

Personal loan: 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.

5. Collateral

Business loan: All business loans require a personal guarantee, but this is considered to be a pretty weak form of collateral since it would require the lender to go to court in order to seize the borrower 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.

Personal loan: Contrary to the popular belief, not all the 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

Business loan: The amount that 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.

Personal loan: 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.  

 

Pros and cons of using a personal loan for business purposes

Let’s look at the advantages first:

Advantage #1 – 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 on the basis of your credit history and your income (again, remember that those are also the requirements for some business loans like the ones offered in Camino Financial).

Advantage #2 – Lower rate of interest

This could be one of the most significant advantages of using a personal loan for business purposes. 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%!

Learn here how to choose a business loan comparing the interest rates

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.

Advantage #3 – 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 from start to finish could take just a few hours! If your venture needs funds urgently, the speed of approval could be a crucial factor.

With that said, some business loans can be also super fast to get. While It may not take a few hours, in Camino Financial you can be approved as soon as on 1 to 4 days.

Advantage #4 – Could be 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. But remember that at Camino Financial we only require 9 months in operations, as opposed to the 2 years required by most commercial lenders.

Now, let’s look at the disadvantages of using a personal loan for your business:

Disadvantage #1- There’s a limit to the amount that you can raise

Business loans could be for large sums. Personal loans, on the other hand, are typically limited to $40,000.

Disadvantage #2 – 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.

Disadvantage #3 – You’re mixing up your personal and business expenses

It usually is not a good idea to mix your personal and business expenses. This can create accounting issues. It can also be a problem when you are paying your taxes. You would have to check each entry in your bank statement and list the two categories separately.

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.

Disadvantage #4 – 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 the level of your income 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.

 

Business credit cards – a great alternative

What if your company can’t raise money from a lender and you don’t want to use a personal loan for business either? 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 in use 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. Additionally, it’s essential to adhere to a list of do’s and don’ts when using a business credit card.

But for many entrepreneurs who need money urgently, there are still other options. Keep reading.

 

Camino Financial: Personal Loans and Business Loans that adapt to your needs

At Camino Financial we offer a wide range of products to cater to your specific needs: personal loans powered by Lendify, microloans and small business loans. If you are unsure of which one is the best fit for you, we’ll assist you and gladly guide you to guarantee your satisfaction.

Personal Loans from Camino Financial

Personal loans from Camino Financial (powered by Lendify) are a better alternative than other personal loans for business owners. If your loan application was rejected by a traditional bank, have in mind that we have fewer requirements. Here are the highlights of taking a personal loan from Camino Financial:

  • Available to borrowers in California, Illinois, Arizona, and Texas.
  • Loan amount: $300 to $4,000.
  • Monthly interest rates: 34% to 36% + an origination fee of $30 to $90.
  • Repayment period: 5 to 40 months.
  • You should have an income of at least $10k per year.
  • Negative days in bank statements are OK. No credit is OK.
  • Estimated time to funding: 1 to 5 business days.

If you want a relatively small amount of money for your business and you need it quickly, a personal loan from Camino Financial may be the best option.

Submitting an online application won’t affect your credit, and it will take only a few minutes. You will immediately be informed if you have been prequalified for financing. Subsequently, our representative will contact you and guide you through the borrowing process. You can apply for a personal loan from Camino Financial right away.

Business Loans from Camino Financial

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, in order to approve your loan, we mainly take into consideration 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. In order 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.

And remember: Camino Financial is open to extending finance to borrowers with bad credit. Additionally, you don’t have to provide us with collateral.

These are the only documents we require from you:

  • Your online application
  • Electronic authorization to download the last 6 months of banking activity
  • Last year of tax returns with reported business income
  • Proof of business registration

All you have to do to start is submitting your loan application. It will take only a few minutes, and you will receive an instant response informing you if you have been prequalified. Subsequently, one of our loan specialists will get in touch with you and guide you through the borrowing process.

 

 

 

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