It takes money to launch a new business. If you do not have enough savings and you cannot get friends or family members to invest, you will probably be considering getting a loan. But should you take out a personal or business loan to help launch your startup? Let’s find out.
You May Need to Prove Your Income
Whether you take out a business loan or a personal loan, you may need to prove your income before your application can be accepted. Thankfully, it is easy to create a paystub online that you can use to prove your income. However, when you are getting a loan to help launch a startup, your business will be pre-revenue, so things get a little trickier.
Getting a Business Loan
Because lenders require cash flow to support repayments of loans, most businesses that are yet to launch or are in their first year cannot qualify for business loans. So, you may have no choice but to take out a personal loan rather than a business loan when you are starting your business.
As your business grows and moves beyond its first year, you will have the option of taking out business loans. You could take out a line of credit that enables you to have flexible funding to use for things like managing day-to-day expenses. Alternatively, you could consider getting a government-backed Small Business Association loan or a traditional term loan, both of which enable you to borrow large amounts. It is good to know what your future loan options are for expanding your business later on.
But first things first. If you are pre-revenue, you probably will not be able to get a business loan. So, you should look at applying for a personal loan to fund your startup’s launch.
Getting a Personal Loan for Your Business
While you cannot borrow as much with a personal loan as a business loan, it is much easier to qualify for a personal loan and you do not need to provide as much documentation. Furthermore, the loan decision is always made much more quickly in comparison to business loans. So, depending on the lender you go with, you could receive the loan funds within a matter of days after qualifying. If you are a new business owner who needs access to capital quickly to launch your venture, getting a personal loan is a good option.
You can get personal loans from a number of institutions like banks, credit unions, and online lenders. It is important you shop around because different lenders will have different rules concerning the use of personal loans for business purposes and they will have different interest rates and terms and conditions. When comparing different lenders, consider things like how much you are able to borrow, what the annual percentage rate and fees are, what the repayment terms are, what the funding speed is, and whether you need to supply any collateral.
Before you apply, it is a good idea to check your personal credit score. By getting a credit report, you will have a better idea of which loan you are most likely to qualify for. Typically, if you have a low credit score, you can still often be approved for a personal loan for business purposes, but the interest rates will generally be much higher compared to someone with an excellent credit score.
You also need to consider how much you ideally want to borrow. You should only borrow the minimal amount you need in order to minimize interest charges. Once your startup is up and running with the help of a personal loan and your business begins to grow, you can then expand further by taking out a business loan.