man receiving cash

Should You Use a Personal Loan to Fund a Small Business?

If you plan to set up a business in Utah this year, a personal loan can be a good choice only if you intend to run a small company as a solo enterprise.

That’s because most lenders normally approve applications for up to $40,000 of personal debt, so you should apply for small business loans in Utah when you need a larger capital. As an example, some people who want to buy a franchise business rely on a commercial loan to afford the initial investment fees.

Pros and Cons

The higher chances of approval for a personal loan serve as one of its biggest advantages. Banks and other lenders only require your credit history, personal information and financial capacity to pay off a loan as opposed to business loans that require a more stringent evaluation. The caveat for personal loans, however, involves higher interest rates especially for those with a poor credit record.

Even if you have an excellent credit score, the average loanable amount for a personal loan often remains smaller than a business loan. Take note that in exchange for a bigger principal amount, applicants of business loans must provide a detailed growth plan and submit more documents for a higher chance of approval. You also need to present enough collateral, which isn’t required when applying for a personal loan

Why Business Loans Are Better

Approved small business loan application and dollar bills

Despite the greater difficulty for gaining approval on a commercial loan, most business owners prefer it over a personal loan because it lets them manage their finances separately. Plus, interest from small business loans in Utah is eligible for tax deductions unlike interest from retail loans.

In case banks have rejected your applications, you should check if the Small Business Administration (SBA) can act as a guarantor for your business loan. SBA loan guarantees under the 7(a) may cover up to $2 million of commercial debt depending on the company’s size. While SBA loans are less stricter than banks in terms of requirements, you still need to prepare documents and expect a time-consuming process.

What Are the 5 Cs of Credit?

Character, capacity, capital, collateral and conditions comprise the so-called five Cs of credit for determining your qualifications as a borrower. Financial capacity to pay off a loan and the quality of collateral might be the biggest factors among the five elements. Lenders want to avoid incurring losses from a potential defaulter.

Your character, which is otherwise known as credit history, and plays a major role as well. Lenders need documented proof of your diligence for timely payments. Capital refers to your investment contribution to your business, while conditions often pertain to the interest rate, principal amount and the purpose of the business loan.

Conclusion

Personal loans can be a good choice for low-capital businesses but once you need to expand your company, a small business loan will be more beneficial particularly because of lower interest rates. Whether or not you choose a personal loan, shop around for loan rates from as many banks as possible to have a better comparison and develop a better financial standing.