An In-Depth Personal Loan Guide for Small Business Owners

It's difficult to get a business line of credit in difficult economic times, which is when a personal loan can be your businesses savior.

29May

A business owner has several types of loans to choose from, but they must understand how and when to use them to make the most of them for the business. Small business owners find that during economic downturns banks are more reluctant to give traditional business term loans or lines of credit. This is where personal loans can give business owners the financial security they need. You've likely heard of personal loans, but you may not be too familiar with when to use them. A thorough guide on such loans lets you make the most of your loan and avoid harming your finances.

When to Consider a Personal Loan

Maybe your business has a few credit cards, each with a different balance and interest rate. Rather than have to remember multiple due dates, consolidate your payments with a personal loan. Opting for a personal loan in this scenario is an especially good idea if the loan's interest rate is lower than your cards' interest rates. Another benefit is you only have a single payment each month after you pay off your credit cards.

Another use for personal loans in your business is to purchase inventory for customer orders. Many businesses face a challenge when customers purchase large orders for them to fulfill.  Their current inventory is too low and they don't have the cash flow to purchase more. This situation can lead to lost revenue and a customer going to a competitor to get the product they need. Using your personal credit and standing with a bank is a great way to get the loan you need to fulfill orders.

Boosting your credit score is another scenario where it makes sense to apply for a personal loan. This ties into using a personal loan to pay down credit card debt. Having both credit card debt and a personal loan on your credit report adds to your "account mix," which is different kinds of debt. This mix improves your credit score, and the same applies to lowering your credit utilization ratio by paying off your credit card debt. You may ask, "Should I check my credit score before applying for a personal loan for any reason?" The answer is a resounding, "yes."

What to Consider Before Taking Out a Loan

Now that you understand more about when to take out a loan, it's time to know what to consider before applying for a loan. For instance, you may wonder about personal loan tax implications. These loans are usually not tax-deductible, meaning that you cannot deduct any of the interest paid on a personal loan. The only time the interest you pay on a loan qualifies for a tax deduction is when you pay interest on a business loan. Even then, stipulations apply. For example, maybe you need personal financing for business and personal expenses. If so, you may have the opportunity to claim interest payments on your taxes, but only if you're legally responsible for the loan and if you itemize the percentage of interest paid for business expenses.

Say that you need a personal loan but don't have a high enough credit score to qualify for a good interest rate. You may need a cosigner or guarantor to sign for the loan with you to get a lower interest rate. If you find someone willing to act as your guarantor or cosigner, it is vital that you do everything you can to keep up with all payments and repay the loan in full. If you default on the loan, then your guarantor or cosigner becomes legally responsible for anything left unpaid.

You also have to time when you take out a personal loan carefully. For example, if you apply for a car loan a few months after getting a personal loan, lenders may reject your car loan application because you have as much debt as they feel you can take on with the new addition of your personal loan. No matter if you plan on applying for a credit card or another type of financing after securing a personal loan, do your best to keep up with all payments.

How to Apply

Before approaching lenders for a personal loan, decide how much you need to borrow, consulting your current budget and revenue to help you decide. Besides the base amount you need to borrow, add the overall interest amount to your calculations. Find a balance between not owing too much in interest and not taking out a large enough loan the first time, which could leave you in need of more financing.

Next, check your credit score and report to get an idea of what you can expect to pay in interest for your loan and whether lenders are likely to approve your application. If possible, get a free credit report so you don't have to worry about a soft credit inquiry ruining your score before you even apply for a loan.

Do some digging to find out where to apply for a loan. Common options include non-banking financial institutions, banks, and credit unions. When you find the right source, research your chances of receiving loan approval. You may need a specific credit score, credit history length, or income to qualify. After that, look into being pre-approved or pre-qualifying for a loan, so you only have another soft inquiry on your creditworthiness rather than a hard inquiry.

Before applying for a loan, sit down and look over the details. Note the loan term, interest rate, expected loan amount, monthly payment, fees, penalties, type of interest, if there's a prepayment penalty, and whether automatic payment withdrawals are mandatory.

Personal loans can help improve your business's financial health, but only when you truly know how to utilize them. Keep the above details in mind should you ever think about applying for personal financing for your business. 

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