If you are starting a home business, you are probably wondering what options are available to you for funding. While you may be able to apply for and get grants to support your business endeavors, grants for private business are few and far between and typically require extensive documentation. For this reason, many people look to loans as the source of immediate funding to get their business off the ground. There are basically two types of loans you can take advantage of for your home business: personal loans and business loans. Which is right for you depends on your business pursuits and your personal financial standing. Knowing the difference between the two and how they can be a benefit is important.
What is a Personal Loan?
As the name implies, personal loans are made to you as an individual. You, and you alone, are responsible for repaying the loan. This means if you fail to make the repayment conditions, the lender holds you liable and may seize your assets to recover the loan. Unless you have a co-signer (spouse's are often required to co-sign a personal loan) the loan is between you and the holder. Your personal credit score and/or any collateral you offer is typically a big factor in the interest rate and terms of the loan the lender offers you. According to Lending Tree, interest rates on personal loans can range from 4.99 percent to 41.7 percent.
Benefits of Personal Loans for Business
- Do not involve extensive paperwork.
- Can be used for any purpose.
- Quick approval time.
Drawbacks of Personal Loans for Business
- Requires a good credit rating.
- May have high interest rates.
- You become personally responsible for business finances and risk losing personal assets if the business fails.
What is a Business Loan?
A business loan is a loan designed for the express purpose of establishing or supporting your business. The loan is taken out in the business name and often requires collateral, such as business assets like business equipment or real estate. Payments are made from business profits, but it often comes with a price tag. If you default on the repayment of the loan and your business collateral is insufficient to satisfy the loan, your personal assets may be seized - unless you borrow from a Limited Liability Company.
Benefits of a Business Loan
- Business profits are used for repayment of the loan.
- Establishes credit for the business.
- Establishes a boundary between business and personal finances.
Drawback of a Business Loan
- Requires documentation of business finances, which may include payroll and tax records.
- May require the services of an accountant to prepare the paperwork.
- Often requires periodic reporting of business finances.
- The loan must be used for specific business expenses.
- May require a personal guarantee, which makes you liable for repayment should the business fail and hold insufficient assets to cover the loan repayment.
One of the biggest mistakes people make when searching for a loan is to apply for a loan before they have explored all their options. While they think they need to apply to find out the rate the bank or credit union will offer, it can do more harm than good to apply too soon. Each time you apply for credit, your credit report is accessed. If the bank determines your credit is not good enough for their terms, the query may prompt a lower credit score on your report. If you apply for several loans and get denied, the score will continue to drop. Check interest rates first, by asking the bank the range of interest on personal loans and the credit score they require and compare it to your current credit score. Wait until you have located a lender that is likely to meet your needs before applying for a loan.