Personal loans are needed for many different reasons. A personal loan is a secured loan without any security attached to it, i.e. nothing has been kept deposited with the bank such as property or gold. It is usually provided on the basis of criteria such as employment history and credit worthiness.
Typically banks would only ask for personal details before granting a personal loan. Securing a loan from an outside investor is also not always possible because he may ask for a share in the profits. This ease of availing personal loan makes it very beneficial for those who run a small business.
- A personal loan has many distinct characteristics which make it useful for a businessman. It is much easier to secure it than a business loan. Usually, the bank would ask for complete business plans and previous financial statements before sanctioning a loan for small and medium enterprises. This might be quite difficult especially in case of a new business which does not have a long history of profitability.
- Personal loans are made available quickly. After the application, some banks may disburse the funds within 1-2 days. The quickness of providing funds is instrumental in running a business smoothly. Not being able to pay creditors and bills in a timely manner because one does not have cash in hand can be devastating for a small business.
- A personal loan is ideal when the business is yet to get off the ground and cannot obtain investment in any other way. Business loans come with many strings attached about how it can be used. A personal loan can be used as the owner deems fit and gives freedom.
Pitfalls of using a personal loan.
- Though a personal loan helps a small businessman in many ways, it also has a lot of downsides. They carry a higher interest rate than business loans. This makes it expensive and adds to the overhead of a business. In most situations, though personal loans from banks work out cheaper than borrowings from other sources such as peer to peer lending platforms.
- Secondly, as the owner, you would be personally responsible for the debt. If you own a limited liability company, the very reason for it being a limited liability is to protect the owner from business debts. That shield is not available anymore, and this may hamper the performance of the owner through added mental pressure. Being a loan defaulter will inhibit the progress of the business since the owner’s creditworthiness will come into question.
- Further, the amount of a personal loan is usually small in comparison to the needs of a business. Personal loans can save the situation if the amount needed is relatively insignificant.
In summary, we can see that there is value in using a personal loan for business purposes, but it is limited in scope. It is a fairly good idea when the business is in the ideation stage but not when it has been in operation for a few years. With proper utilization, a personal loan can prove to be a boon for most people in business.