Startup Funding and Personal Loans

Securing funding for a startup is notoriously difficult during recessions when caution reigns. Entrepreneurs spend a significant amount of time approaching banks and investors for funding, but may be denied for reasons often beyond their control.

If you need faster, more flexible funding, personal loans are worth considering. In this guide, we will break down the pros and cons of using personal loans to launch your startup.

Understanding the Startup Funding Landscape

Traditional startup funding includes:

Venture capital: Highly competitive way of funding. Venture capitalists can be helpful as they guide and nurture startups. They tend to favor high-tech startups with proven traction.

Angel investors: Private investors can offer significant early-stage capital to startups. The kind of strings attached will vary.

Crowdfunding: If you want to build a community and test your concept without too many hoops, crowdfunding is a potential option.

Bank loans: Bank loans have a strict and slow approval process, but usually have lower interest rates than online lenders.

Personal loans are a viable alternative to all traditional startup funding types. Quick and accessible, personal loans allow startup founders to retain more ownership and autonomy.

The Advantages of Using Personal Loans for Startups

Flexible

Personal loans are the most flexible way of launching or growing a startup since you can use the money at your discretion. There are rarely any restrictions on how you can allocate the funds. You could use portions for equipment, operating costs, marketing, or any business needs.

Speedy

Bank loans and venture capital deals can drag on for months. The uncertainty of whether you’ll secure the funding is stressful, and an ultimate lack of funding can be torturous.

If you need to meet a deadline or have an immediate need for funds, personal lenders are a fast way to obtain funds. Some online lenders offer same-day approval and funding options, allowing you to meet any time-sensitive deadlines.

Ownership retention

You don’t have to give up ownership or take on a partner with a personal loan. You can maintain control of your burgeoning startup.

In addition, you can avoid equity dilution. Not giving up equity in the business matters a lot to some startup founders. Venture capital and angel investments usually force you to give up significant equity as you grow your startup.

Lower credit score requirements

Even if you have a poor credit score (i.e. below 600), personal loan providers can still approve you for loans. It is much harder to obtain a bank loan or funding if you have poor creditworthiness.

Assessing Your Financial Situation

Personal loans aren’t for everyone. To determine loan feasibility, here are some key points to consider:

Credit score vs. business credit

There are two types of credit scores: FICO and VantageScore. You can check your credit score (300 to 850) for free. A high credit score means you can obtain better loan terms and bigger loan amounts. If you have an excellent credit score and aren’t in a rush, it might make more sense to obtain a bank loan instead of a personal loan.

A personal loan wouldn’t affect your business credit score, for better or for worse. If you want to build business credit to improve your business’ future opportunities, an official business loan might be preferable.

Personal liability

When you take out a personal loan, that debt will be on you, not your business. If the business fails, you will still be personally liable for that personal loan debt. Missing a payment means your own credit score will drop, negatively impacting your future ability to obtain loans.

Repayment plan

Personal loans can be a great way to access funds fast, but a large loan you can’t pay back would be seriously detrimental to a startup in the long run. Before taking out a loan, make sure you have a feasible way to repay the loan according to the repayment terms.

If you have any existing personal loans, it can be a struggle to manage the different repayment plans.

Choosing the Right Personal Loan

If you’ve decided that personal loans are viable for your startup needs, don’t take out the first loan you see. The wrong personal loan can weigh you down like a boulder with unmanageable terms and interest accumulation.

Compare different loan terms and providers before you opt for a personal loan, since the binding agreement can have serious financial consequences if you can’t repay the loan. Here are the key points to consider and compare when selecting a loan.

Interest rate

Personal loans range between 6% and 36%, with the average personal loan interest rate being around 12.5%. The interest rate you receive depends on your credit score, credit history, existing debt, loan purpose, and other factors.

It’s wise to avoid loans with an interest rate higher than 36%. These predatory loans are nigh impossible to pay back due to short repayment terms. For example, payday loans can have interest rates that exceed 300%.

Tip: Compare the APR of the loan, since the APR takes into account both interest and fees.

Repayment period

The loan tenure is how long you have to repay the loan. Usually, you would get 1 to 7 years to pay back a personal loan. You can choose between different loan repayment periods. Make sure you have enough time to comfortably repay the loan plus interest. At the same time, choose a period that comes with lower monthly payments to reduce short-term financial stress.

Basically, ask yourself how much time you’d realistically need to repay the loan (regardless of the success of your startup).

Fees and hidden costs

Personal loans may come with tricky fees that make it more expensive to borrow than you expect. Read your loan agreement carefully and note down possible fees. Common surprises that borrowers don’t notice include:

• Origination fee (AKA application fee)
• Prepayment penalty for paying back the loan early
• Late fees

Default risks

If you fail to repay a personal loan, the debt may be sold to a debt collection agency. They are notorious for hunting down loan repayments.

Late payments and loan defaults can be severely harmful to your credit score. This would make it challenging to obtain other loans and credit lines in the future.

Loan amount

Personal loans for startups usually give you a minimum of $1,000 and a maximum of $50,000. If you need more than that, the lender will likely require higher credit score minimums. Carefully consider how large a loan you need, since that will determine the cost of borrowing and difficulty of timely repayment.

Approval speed

Some online lenders offer same-day or next-day approval and funding for personal loans. That’s fast, which can help you pay off urgent expenses for your startup. Entrepreneurs with minimal leverage often work with time-sensitive opportunities, so you might want to choose a personal loan provider with fast approval speeds.

Specialized startup loan programs

Personal loans are generalized loans provided by lenders. You can also obtain specialized startup loans that have specific purposes. These loans may be limited or tailored to certain entrepreneurs.

Lender reputation

Don’t settle for an unreliable lender. Check out the best personal loans for startups with fast comparisons of features and estimated APRs.

Utilizing Personal Loans Responsibly

Because personal loans are so readily available to even business owners with poor credit, it can be easy to fall into a pool of personal loan debt. Be sure to use personal loans as a strategic tool for your startup and not as a blank check. Here are guidelines for responsible borrowing:

Only borrow what you need

Can doesn’t mean should. If you qualify for a larger personal loan than you need, it can be tempting to take out the entire amount. However, don’t overborrow. Calculate in a spreadsheet how much you actually need for launching or growing your startup. Break down the marketing, product development, equipment, and other costs you plan on using the loan for.

Create a startup budget

Your budget should be as detailed as you can reasonably make it. Consider both fixed and variable expenses. Budgets for a startup usually include:

• Monthly loan repayments
• Rent/location costs
• Marketing
• Tax obligations
• Salaries
• Software
• Equipment
• Emergency fund

Track all expenses

Track all income and expenditures used for your startup carefully. After you’ve built a business budget, you need to stick to it (unless there is an emergency, of course). Deviating from the budget once makes it easier to deviate again and again until you end up with a need for another loan.

As an added bonus, tracking everything makes filing taxes or disputing claims much easier later on.

Allocate strategically

When you use funds from the personal loan, make sure they are spent with intention. If you purchase anything and everything that might be useful without an actual reason, it can be easy to run out of funds. It’s important to treat the personal loan funds as a valuable, limited resource. Avoid using the loan funds on anything that doesn’t directly support the launch or growth of your startup.

Prioritize loan repayment

If you have to choose between paying off two different loans, it is generally good to pay back the loan with the higher interest rate first. This allows you to reduce the financial burden.

If you have to choose between paying back a business loan and a personal loan, that is more complicated. Consider the consequences your startup or you might face if you make a late payment or end up defaulting.

Mitigating Risks and Challenges

Having the right risk minimization strategies can make or break your startup.

Maintain a contingency fund

More often than not, startups will need to overcome unexpected hurdles. A contingency fund is essential. When it comes to personal loans for business, experts recommend setting aside at least 3 months worth of loan payments and essential expenses. .

Address personal liability concerns

It’s important to consider your liability risks when running a startup. Did you know that small businesses face the most liability lawsuits? These lawsuits are also a huge reason why startups fall apart even if they have good product-market fit and marketing.

Don’t rely on a single source of capital

It’s dangerous to put all your eggs into one basket. See whether it might be beneficial for you to spread out your funding methods. This can help lower your overall business risk. For example, your startup can combine a modest personal loan with lower risk funding options, such as crowdfunding and grants.

Summary

Personal loans can be a great way to access capital quickly and flexibly. You gain the possibility of retaining full ownership of your business and don’t need to dilute equity for the funds, which are downsides of traditional funding options. However, personal loans come with risk: personal liability, interest, and repayment can be heavy burdens, especially if your startup struggles.

Key steps for how to get a personal loan for funding a startup:

• Assess your finances and funding options
• Set a clear budget and repayment plan before borrowing
• Borrow only what you need
• Keep a contingency fund for emergencies
• Monitor your spendings and credit score
• Prioritize repayment

With responsible borrowing and strategic financial planning, personal loans could be a viable way to launch or grow your startup.

About The Author

Ru Chen

Content Writer

Ru Chen is a content writer with several years of experience in creating engaging and well-researched articles. She mostly writes about business, digital marketing, and law. In her free time, she can be found watching horror movies and playing board games with her partner in Brooklyn.

Articles by Ru Chen

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