For those that want to start a small business rather than a side business, expect a huge need for financing. Before considering how to improve profitability of one’s small business, think about financing options—especially since funds won’t be purely out of pocket.
There are plenty of finance options available for new, small businesses. It’s simply a matter of determining what will work for them!
One of these funding options includes personal loans. But what are personal loans?
Personal loans can be defined as money borrowed from a bank, credit union, or online lender that a borrower pays back in fixed monthly payments. This loan term typically last between two to five years.
Types of Personal Loans for a Small Business to Consider
Secured Personal Loans
Secured personal loans are backed by collateral, hence the name, which allows potential customers with varied credit (or unestablished credit) to receive funds when beginning their small business. Examples of these secured personal loans include car title loans and housing loans.
- Obtainable for a small business that is just starting up.
- People with varying credit can apply for one.
- Funding could be received in just a few business days.
- Competing lenders may charge high interest rates.
- Not available as a financing option in all states due to regulations and laws against them.
Unsecured Personal Loans
Another common type of personal loan, this financing option could be obtained without collateral. This means a person funding their small business won’t lose their property because it wasn’t used to secure the loan. However, unsecured personal loans typically look at credit history to see if a person qualifies for one. Examples of unsecured personal loans include credit cards.
- They don’t require collateral to secure funds.
- Depending on the lender, unsecured loans could be easy to qualify for.
- Credit is a major deciding factor for unsecured personal loans.
- May charge slightly higher annual percentage rates.
- Could have longer loan terms than secured personal loans.
Fixed Rate Loans
Fixed rate loans are personal loans that carry fixed rates. If a person wants consistent payments each month and they’re concerned about rising rates, then a fixed rate loan may be a good option—especially for small businesses.
- Easier to budget because a person won’t have to worry about their payments changing.
- Rate and monthly payments stay the same throughout the duration of the loan.
- Interest rates are usually higher compared to other personal loans.
Variable Interest Loans
Variable rate loans are tied to a benchmark rate. These rates are typically set by banks. Depending on how that benchmark rate ends up fluctuating, as well as the rate of the loan, payments can rise or fall with these loans.
Examples of variable interest loans include home equity lines of credit (HELOC), and other personal loans that meet these criteria.
- Usually carry lower APRs than fixed-rate loans.
- Can be a good advantage if the loan carries a short repayment term as rates may increase.
- Can be risky in a rising interest market.
- Borrowing at or near the repayment capacity can be very risky!
Debt Consolidation Loans
These types of personal loans roll multiple debts into a single new loan that will carry a lower APR than the rates on existing debts. This type of consolidation provides a great advantage for small business owners; especially since it combines all debts into one fixed monthly payment.
- Combines all debt into a single, fixed monthly payment.
- Depending on the lender, this type of loan could carry a lower APR.
- May not provide a long-term solution if a small business owner has trouble controlling their spending.
- Borrowers may have to pay upfront costs.
Borrowers with no type of credit history looking to fund their small business can look into co-sign loans. A co-signer promises to repay the loan if the borrower fails to keep up on their monthly payments. Having a co-signer with strong credit could also improve a small business owner’s chances of getting a lower rate or more favorable terms on this type of loan.
- Great for those who have a non-existent credit.
- Provides a safety-net if a business owner fails to pay the loan on time.
- Could strain a relationship with the co-signer if repayment becomes difficult for the main borrower.
- Major problems if the co-signer also has trouble repaying the loan.
Personal Line of Credit
A personal line of credit, or revolving credit, is like a credit card. A business owner will get access to a credit line, which can be used to borrow money on an as-needed basis. They will then have to pay the interest on what they borrow.
- Great for when business owners need to pay off purchases as soon as possible.
- Avoid paying interest on the full amount.
- A good source for emergency funding.
- Not good for those who may overspend or have trouble budgeting.
- Many credit lines have an annual fee, regardless of whether credit is used.
- Lenders don’t diversify their mix of credit accounts like an installment loan would.
Payday Loans and Others
Other types of personal loans that don’t fall in these other categories include the likes of payday loans, credit card cash advances, and pawnshop loans. Payday loans are short-term, high-interest rate loans.
A credit card cash advance is a short-term cash loan that can be received from a bank or an ATM using a credit card.
Pawnshop loans are a secured personal loan where someone can borrow against an asset, such as jewelry or electronics. These loans are a financing option for business owners at most local pawn shops.
- Various financing options that have differing qualifications that may not involve credit.
- Can be inexpensive and a small start in funding a small business.
- Expect high interest rates and rollover costs.
- Many loan options tend to be risky to one’s credit or property.
Other Funding Options to Consider for a Small Business
Those that may not consider personal loans to be the right financing option for them could check out what other financing options are often offered to startup businesses.