Both secure and unsecured personal loans have increased in popularity over the years. However, this loan type has mostly been used for covering abrupt expenses, home renovation projects, or clearing significant credit card debts. But can personal loans be essentially beneficial for a small business?
In this guide, you’ll learn more about the benefits of personal loans on small businesses. And although many people term debt as the root of all evil, it’s mostly the root of most success stories. However, this is only viable if there is a strategic plan on using the funding wisely.
What is a Personal Loan?
As the name suggests, a personal loan is a money borrowed for multiple purposes. However, some lenders do have their directives on how you can and can’t use this type of loan. And like any other loan type, personal loans are paid over a specified amount of time with some added interest.
As you may know, most personal loans are unsecured. This means that you get funding assistance from the lender without them considering any collateral. Also, the secured personal loan needs you to place an asset as collateral in case you default. The secured personal loan offers are usually lower, making them quite unpopular.
Various Types of Small Business Personal Loans
1. Secured Loans
This is an installment loan usually backed by savings, a car, or other assets as collateral. Therefore, the lender has the option of seizing the collateral if the borrower defaults on payments. This loan type is less risky for the lenders, so they place a lower interest rate on it.
As a result, a secured loan is the cheapest type of personal loans to seek funding assistance.
2. Unsecured Loans
An unsecured personal loan is totally opposite from the first option and is the most preferred type of personal loan. It doesn’t demand collateral, and borrowers can pay in installments for a prolonged time in monthly increments. Unsecured loans have great deals, but this highly depends on your credit score.
Therefore, your credit score highly determines the amount you can get from this type of loan.
3. Debt Consolidation Loans
This type merges multiple debts as a single loan and demands single monthly payments. It’s very helpful in clearing your credit card debts, emergency bills, and other personal loans.
4. Consigned Personal Loans
This can be a secured or an unsecured personal loan with more than one person guaranteeing the lender payment. This is mostly applicable if you have a lower credit score. Here, the lender requires that you have someone willing to be your consigner if you default on payments.
The consignee here is a form of insurance for the lender.
5. Personal Line of Credit
This works more like a credit card, except here you only access a credit to borrow when in need. Additionally, you only pay the interest on what you’ve borrowed.
The above listed are some of the most common types of personal loans. And now that you’ve understood them, let’s find out their benefits on small business.
Benefits of Personal Loans on a Small Business
1. No Collateral Required
As explained above, unsecured personal loans don’t require any collateral when borrowing. Moreover, you are offered a fair amount of time to clear your balances. This means that a struggling small business may use this loan adequately without any collateral.
Better yet, the grace period offered ensures the small business gets a decent period to the peak.
2. Relatively Lower Interest Rates
Unlike credit cards, personal loans are mostly low-interest rate loans, with percentages starting from 5-6%. However, this still depends on your credit score, among other factors.
With such favorable rates, a small business can leverage on productivity instead of worrying about massive interest payments to cover. Moreover, personal loan interest rates don’t spike suddenly to unbearable numbers, as is the case with most credit cards.
3. Relatively Higher Borrowing Limits
Personal loans have a bit more generous borrowing limits compared to other funding alternatives. On average, lenders here offer $25,000 to around $30,000 loan principals. And SoFi, a popular lender of personal loans, offers borrowers limits of up to $100,000.
This number depends on several factors, such as income, credit score, and assets, among others. In the context of a small business, such generous numbers mean you can add stock and cover expenses when things aren’t that ripe.
When running a small business, you are certainly managing many numbers. And additional calculations might easily consume your balances. Therefore, a personal loan is a great consideration because it offers a single and fixed rate.
This means that if you need to borrow $30,000, you only need to ask for that amount. It isn’t the same as using multiple credit cards that have different spending limits.
5. Prolonged Payment Terms
Personal loans offer prolonged payment terms ranging from 2-5 years. Additionally, some generous unsecured lenders offer payment terms for longer than eight years. This is a massive advantage, especially for a small business.
You get enough time to invest and leverage the acquired loan while slowly paying it off.
6. Predictable Payment Plan
With other loan options such as credit cards, repayment options aren’t usually predictable. But because personal loans are fixed interest rates and are installment loans, it’s possible to formulate a repayment schedule.
It is easy to rearrange the repayment schedule during the loan’s approval. You’ll know the amount to repay every month, the number of months, and the total interest of the loan acquired.
As a small business, this plan will be beneficial in setting goals for repaying the loan. Moreover, it becomes easier to track if indeed the business is benefiting from the loan.
As you have seen, there are multiple benefits of personal loans for small businesses. Most lenders desire to support you financially, even if the needs don’t meet these loan type criteria. But note that they still consider your income and credit status.
All in all, personal loans are great funding considerations for a small business. There’s a potential of getting a higher borrowing limit with prolonged repayment terms. And frankly speaking, this is good news for any business owner out there.