Finding the funds to start a new business can be as challenging as starting a business itself. Many times it is difficult for a startup business to get a conventional business loan; therefore, many entrepreneurs have to look at other means for funding startup cost. There are many entrepreneurs that are reluctant to use personal debt to cover the cost of starting a business and there are those who advise against using personal debt to start a business. However, in today’s unprecedented economy and with never before seen changes in the business world, funding the cost of starting a business with personal debt may be the most attractive option for an entrepreneur.
There are risks associated with any type of financing. Whether a potential business owner finances the startup of a new business with a conventional business loan or with a personal loan, that business owner needs to understand the risk of the situation. Once these risk factors are taken into account, there are several reasons why an entrepreneur may want to fund startup costs with personal debt versus a conventional business loan. A personal loan may benefit the entrepreneur from the standpoint of availability, cost, and timing.
Availability: Many banks are reluctant to lend to startup companies. Even potential business owners with a thorough business plan might have difficulty receiving startup cash. Many times, a small unsecured personal loan can be easier for an entrepreneur to secure than a conventional business loan. A quality credit score can lead to better lending terms and potentially give a person enough money to buy basic equipment for small business.
Cost: A personal loan can many times be less expensive than a conventional business loan. We all currently live in a world of historically low interest rates. An individual with a good credit score can probably get a lower rate on a home equity loan, for example, than any type of business financing. Personal credit cards bring a whole different amount of risk to what is described above. While personal credit cards still provide the availability that a conventional business loan might not, credit cards might not provide cost savings as detailed above as some credit card rates may be higher than personal loan rates (likewise, loans against 401(k) dollars and retirement funds also can provide a different set of risk).
Timing: Most of the time a personal loan is not only the cheapest but also the quickest way for an entrepreneur to access cash. Whereas some conventional business loan decisions can include a lengthy approval process or a tedious underwriting process, many personal loan decisions are made the same day and sometimes within hours. An individual can get an answer on a home equity loan or line of credit, for example, in afternoon. Additionally, there are times when a financial institution will require personal assets (such as a home) as additional collateral to back up a conventional business loan. If a conventional business loan (or an enhancement like utilizing a SBA program) requires a personal residence as collateral, why not just use the equity in the residence to take out a personal loan (which as stated be above will probably be at a lower cost and completed in a shorter amount of time)?
If you are starting a business with any kind of financing, you need to be aware of the risks involved. Once you weigh the risks and have completed your proper due diligence, you may realize that personal availability to credit is your best option in gaining the funds to start that business.