Personal Loans to Start a New Business

2020-11-04T16:04:06-08:00November 2nd, 2020|Credit & Debt|

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Personal Loans to Start a New Business

Starting a new business is exciting. And nerve-wracking.

A lot goes into the new endeavor including time, energy, and money. There are almost no businesses that don’t require at least a little bit of an initial investment, which makes a new business brainstorm challenging to pull off if you don’t have access to a ready supply of cash in your bank account.

While it might seem daunting to try and find investors or tap into your savings accounts to gamble on a new business, you do have other options.

Finding Funding for a New Business

If you’re considering a new business, you are going to need cash. In addition to the many things you need to buy to get started, you also will likely take a bit of time before turning a profit. Having cash buys you some breathing room. You can usually arrange financial backing in a few ways:

Personal savings.

If you have been saving up for years to help launch your dream, you can use your own stockpile of cash to get started. The downside of this is that once your money is out, it’s out. Also, if you spend all of your savings on a new business, it doesn’t give you much cushion at home if you wind up with an expensive repair or another emergency.

Business loans.

Banks do offer loans specifically for your business idea. To apply for a business loan, you must provide the profitability of your business idea and draft up an extensive business plan. Having a business plan is always a good idea, but banks tend to be extra conservative with new business funds, so you may be in for an extended vetting process.

Personal loans.

Personal loans rely on two things – your income and your credit score. If you have a business idea that needs less than $40,000 to get off the ground, a personal loan might be the sweet spot between spending all of your own savings and proving yourself to a traditional bank.

Starting a Business with a Personal Loan

A personal loan can be used for just about anything you buy. It’s an unsecured loan that is tied to your FICO score, much like a credit card. But unlike a credit card, a personal loan is set up to be repaid in installments.

You take out a personal loan for $30,000. You start making monthly payments the next month. At the end of the payment cycle – 36, 48, 60, or 72 months in most cases – you have repaid the loan completely.

This makes a personal loan an excellent idea for a small business.

The Benefits of Using a Personal Loan for Your New Business

Personal loans hit the middle ground between risk and reward when starting a business. If your small business idea can be launched using the funds from a personal loan, it may be an excellent option.

No formal presentations.

A personal loan will not require a business plan or a presentation on your part because it’s not tied to your business idea. You could also use the personal loan to buy a boat, pay off credit card debt, or travel the world if you chose to. The funds are yours with the expectation that you make the set monthly payment on time.

Keep your own savings.

Even if you have savings enough to get your idea off the ground, a business loan lets you keep saving and keep that cushion at home in case you need it. The personal loan will deliver funds up front and all you have to do is make a small monthly payment.

Use the loan funds as you need to get started, and then use your savings to make a small monthly payment until your business becomes profitable enough to take over the payments. You wind up ahead with a new business that pays for itself and a nice cushion of savings at home.

Lower interest rates.

Some people try to get a business started using credit cards or using funds they pull from their retirement accounts. In both instances you are missing out on the opportunity provided by low interest rates on personal loans. Credit cards charge very high rates of interest. And every
month you don’t pay the card off, you are paying more and more for the money you borrowed in the first place.

Personal loans charge you a set interest rate and that rate never increases. In most cases, the interest rate on a personal loan is far less than you’d pay trying to repay credit card debt. Likewise, in most cases, the interest rate on a personal loan might be less than the compounding
interest you’d be earning if you left your own retirement savings in place.

The more money you have in retirement or brokerage accounts, the faster your savings add up. Pull money out as a withdrawal or loan and you will see your earnings shrink. Even if you have the option, it likely makes more sense to simply borrow the money through a personal loan and let your retirement money continue to grow.

A new business is exciting, and it can be stressful as well as you try to make it work. Finding the funds to get your idea launched might not be as hard as you think if you are able to take advantage of a personal loan.

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