Understanding Personal Loans
Personal loans are paid to you, the individual. Lenders use your credit score, your income and your general financial situation to assess whether they're willing to loan you money, how much they'll let you borrow, and the terms of the loan agreement - if a lender deems you to be at higher risk of default, you may face a higher interest rate.
Because a personal loan is in your name, you are personally liable for paying it back. If you use it to fund a business, you'll need to take on the risk of paying the loan back if that business underperforms. Failing to service the personal loan can affect your credit score.
This is one of the key differences between a business loan and a personal loan: most business loans won't make you personally liable for paying the business credit back. If worse comes to worst and you default on a business loan, the lender will focus collection efforts on the business, not you. (There are some instances in which you may be personally liable for your business debt, such as if you’ve signed a personal guarantee as part of the business loan agreement or have been found to have allowed your business to fraudulently or trade recklessly.)
But that risk aside, a personal loan can certainly be used to help you start a small business. It might be your only realistic option.
Many business loan lenders will require a minimum of one year of trading history before they even consider offering a business loan. They may also have minimum annual revenue requirements and other conditions. Business credit simply isn't a viable option for a large number of startup businesses.
Personal loans, on the other hand, are a good option for anyone with a decent credit rating. Personal loan applications can also be completed and approved quite quickly, granting you access to an up-front lump sum to kick-start your business.
Pros and Cons of Using a Personal Loan for Business
If you can use a personal loan to start a business, the question becomes whether you should use a personal loan to start a business. To find out, let's compare the advantages and disadvantages of doing so.
The pros of using a personal loan for business.
- Most people with a solid credit score can access the lump sum they need to start their business.
- Applying for a personal loan is a relatively quick and easy process, and in some cases, approval can be granted within a single business day.
- Interest rates can be surprisingly attractive, particularly if you have a good credit score - they can be below that of a credit card, for example.
- There are no limitations on how you use your personal credit: you can spend it however you see fit, including for business purposes, from funding a startup business to improving cash flow.
- Many Personal Loan providers provide unsecured personal loans, which may mean that you won’t need to provide collateral to support your loan.
The cons of using a personal loan for business.
- Unlike a business loan, you're personally liable for paying back a personal loan. If you fail to do so it can affect your credit score and personal financial situation.
- The relative accessibility of personal loans can make them a higher risk for a lender (at least compared to a business loan), so they may come with a slightly higher interest rate.
- Personal Loans are typically offered up to $50,000 - $100,000, so if you require a higher amount than this for your business you will need to consider other options.
Factors to Consider Before Taking a Personal Loan for Business
Using a personal loan to start a small business won't be the right choice for everyone. You should consider the following factors before you commit:
- Assess your financial situation: Are you currently in a position to take on the level of debt that your new small business requires?
- Check your credit score: Is your credit history healthy enough to secure the money you need at a reasonable interest rate?
- Read the terms and conditions: You need to ensure you understand all the rules and responsibilities that come along with a personal loan.
How to Get a Startup Business Loan
You've checked your eligibility, you've weighed up the pros and cons, and you've considered all the relevant factors. You believe that a personal loan is the best way for you to fund the creation of your small business. If you choose this option, it's wise to:
- Create a business plan: You should begin by outlining your business idea in detail. You should consider your products and services, pricing, target market, demand and competitors. Use this research to develop financial projections that give you a sense of how much you need to borrow to get your idea off the ground.
- Shop around: Compare as many personal loan options as you can.
- Borrow money conservatively: Remember that you're personally liable for paying the loan back, so only borrow what you absolutely need.
- Build an emergency fund: From the very beginning of your business, you should set aside cash to help you navigate slow periods and unexpected expenses.
- Get loan help from professionals: An accountant or financial professional can help you navigate the complexities of using a personal loan to start a business.
Apply for a startup loan.
If you’ve decided you want to investigate using a personal loan to fund your new business, we’re here to help. With an extensive network of 25 branches across New Zealand, our Instant Finance experts can guide you to a personal loan that can help to bring your entrepreneurial dreams to life.
Apply now to secure your perfect personal loan and start your new business.
FAQs
How much can I borrow to buy a business in NZ?
"How long is a piece of string?" The answer to this question will depend on a wealth of factors - most importantly your financial situation, which will inform how much a lender is willing to lend. But as a general rule, a lender will finance 40%-60% of the business purchase price.
Can I roll my personal loan into a business loan?
Once you have been in business for some time - usually over a year - you may be able to consolidate your personal loan into a business loan.