Small business owners only have a few choices when they are applying for a loan. Either business loans or personal loans. The best choice depends on what they can qualify for, interest rates and terms. The requirements are different. A business loan depends on a high business income, will have higher rates and shorter terms. But it may be the better way to go depending on the customer personal credit status.
Business Loan
A business loan can help entrepreneur to start a new business or capitalize their current business or make up for a slack of revenues. The credit status of the business is analyzed rather then the person. A business loan should not affect the credit of the person, just the business. While there are different types of business loans, some loans are structured for certain situations or specifications. For instance, equipment loans are used to finance the purchases of equipment items, which constitutes a collateral. A term loan strictly depends on business income and stability. It’s highly recommended to note down your credit status, preferences and factors surrounding your current situation before applying for any kind of business loan.
Personal Loan
A personal loan is dependent on your personal credit score. The money is transferred to your bank account and ready to use for whichever purpose you need it. if you could not qualify for a business loan, you may consider a personal loan and use it for business. However, statistically they are more often used for non-commercial purposes. Whether you are in need of cash for school or improving your home, or pay off debt, there are personal loans categorized for these cases. Other people may even acquire personal loan to purchase a car or pay for medical bills. In the end, it all depends on how you will use this loan.
The Different Requirements of a Business or Personal Loan
Loan underwriters take a look at the profitability of your business or employment, industry, cash flow, time in business, as well as other factors to extend your financing. Moreover, specific business characteristics help underwriters determine the terms, rates, and the amounts that they can offer to the business or applicant.
Although the income and credit history of a business is very important, the points of data have different variables involved. This means, there is no single point that is mainly the definite yes-or-no factor.
Making a Choice Between Applying for a Business or Personal Loan
Be mindful in using a business loan and personal loan for the same thing, though; it can be a risky endeavor. If you can’t pay back the principal on your business loan for whatever reason, a lender will look to make you personally responsible you rather than your business or vice versa. Whether or not you should go for a business loan or personal loan will depend entirely on the matter at hand. The same could not be said for other small-to-medium business owners. It is not as straightforward as you think. If you happen to be one of those, don’t fret. You should be able to know where you are in your business life cycle.
Separate Your Business Account from Your Personal Account
One of the challenges of being a small business owner is drawing a fine line between your work and personal life. But just because the two can easily mesh, it does not mean your finances should too. For the record, you can’t mix your business and personal finances together. It’s a recipe for tax disaster, especially if you don’t know how to manage them.
More Options or Alternatives to a Term Loan
Personal loans, more often than not, are term loans. You take out one and pay it back in a specific amount of time plus interest. The same could not be said about business loans. Depending on your needs and budget, there is a wide range of financing available for you to choose from. These include but are not limited to merchant cash advance, SBA loans, invoice financing, and equipment financing.
Building Business Credit
In most cases for small businesses, your personal credit score would be a starting factor in the process of underwriting a business. By getting a business loan, even if your personal credit score is used at first, you can establish business credit over the course of time. When build business credit, then all future loans should be business loans strictly issued based on the business credit score and not your personal score. You always want to protect your personal score score.
Credit Star Funding also works with an experienced law firm to clean the worst credit and give you the fresh start that you need to get funded.
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