As we’ve previously covered, there are many possible ways for aspiring entrepreneurs to fund their small businesses. From SBA grants to crowdfunding, there are many options to consider. But one that some are hesitant to take is a personal business loan. Loans are typically seen as the choice for someone who doesn’t have an alternative, who doesn’t qualify for other funding options.
There is good reason to be cautious: borrowing at the wrong time, or for the wrong reasons, can put even a successful business into financial jeopardy. Still, finding small business financing can be tricky, so there are some situations where a loan is the best option available. The important thing is to determine if a business loan makes sense for you and your nosiness.
Ask Yourself Some Questions
Before you even consider taking out a loan for your business, you need to ask yourself some hard questions. First and foremost: what specifically do you plan to do with the money you’re hoping to get? If you can’t give yourself a definitive answer of how you’ll use borrowed capital to push your business forward, then it might not be a good idea to borrow at all. With any loan, you need to determine if the rewards of borrowing are worth the expense, so if unless you have a specific plan in mind, a loan might not even be worth it.
Assuming you do have a plan though, the next thing to ask yourself is if your current cash flow will be enough to support regular loan payments. Even if you’re financially stable right now, making room for weekly or monthly payments can be a challenge, especially if your business has a fluctuating sales cycle, such as in construction, retail, or the restaurant industry. Many businesses also have “busy seasons” that might need to be considered as well, which might mean that you would be better off prepaying a loan during a period where you expect to have a higher income.
Regardless, you should always operate under the assumption that your cash flow will more-or-less be the same as it right now when determining if you can afford to pay off a loan. Obviously, you one would hope that their cash flow would increase thanks to whatever investments they had made with their loan, but you cannot know for sure how much of an impact it will actually have. The last thing you want is to take out a loan assuming you’ll be bringing in more money, only for business to be slow.
What About a Personal Loan?
In some situations, a business loan might not be an option, so some people might wonder if they can take out a personal loan to help fund their small business. This is harder to answer than it might seem: of course, you CAN decide to fund your business through a personal loan, just as many others have, but what business owners need to ask is “SHOULD I use a personal loan to finance my business?” Many business experts will warn you that you never mix personal and business finances, and with good reason. If you cannot meaningfully differentiate between the two, your personal finances are at risk if you end up in a lawsuit.1
That said, there are a few situations where a personal loan can be a viable option. If you’re a younger business owner with limited financial history, getting a small business loan will be difficult, since you’ll lack the kind of experience to show that you can be trusted with such a loan. Additionally, some business loans have absurdly high rates, to the point where it is sometimes the more economical option to just go with a personal loan. Of course, even in situations like this, you need to be conscious of how you are going to pay back the loan and the overall cost-benefits of going with one option or the other.
Weighing Your Options
Ultimately, there’s no easy right or wrong answer when it comes to whether or not you should take out a loan to fund your business. Both business and personal loans have unique benefits: business loans can be good options for more established business owners with a strong financial history, while personal loans allow for cheaper rates and more flexibility on how the money is used. Yet loans always come with potential risks, with personal loans being especially risky due to how they can blur the line between personal and business finances.
In the end, a loan is a perfectly viable option but it should not be your first choice. Look towards other funding options to see if there is something better geared to your specific needs. Whether by pursuing venture funding or just establishing a business line of credit, there is no shortage of funding options for small business owners. It is simply a matter of finding the right one for the job.
1. U.S. Small Business Administration. (n.d.). Basic Information About Operating Agreements. U.S. Small Business Administration. https://www.sba.gov/blog/basic-information-about-operating-agreements.