If you have reasonably sound credit, it’s easy to get a personal loan. In fact, there are probably several companies actively clamoring to loan you money. When starting a business or trying to grow your company, though, steer clear of using personal funds. Despite the easy access, introducing personal funds into your professional endeavors can get messy quickly. It can leave your credit in shambles if things go wrong.
The Checks and Balances of Business Loans
One reason that business loans are harder to get than personal loans is that lenders are concerned with more than just your credit. They want to see a viable business plan. If it doesn’t look like your business has a chance of succeeding, and that you’ll be able to pay back that loan, then business lenders aren’t going to offer you any funds. In other words, if a business lender turns down your application, it may be time to go back to the drawing board. Workshop your business plan and talk to more experienced entrepreneurs. This ensures that your idea will actually bear fruit.
The Messy Business of Mixing Money
In addition to the ways in which business lenders assess ideas for their potential to succeed, business loans provide you with a financial check. It keeps entrepreneurs from mixing personal and professional funds. Once you start intermingling your finances, it can be hard to keep track of income and debts. And it can also prevent you from building business credit.
Another benefit of keeping your personal and business finances separate is that it allows you to start building a financial history for your company. If you take out a personal loan for business expenses, the outcome, such as whether you can pay it off on time, only impacts your personal credit. Since you’re going to need a strong business credit line down the road, it’s better to separate your personal and professional finances from the beginning.
Assessing Alternative Options
Understanding that you should avoid mixing personal and professional funds whenever possible, it’s time to assess the many other options you have for funding your enterprise. Plus, you can use many of the same tools you would use to find a personal loan. As you research loans online, consider questions like how much you need to borrow. Along with what interest rates are being offered and how long you’ll likely need to pay off your loan. You should also consider what alternatives to traditional loans are available to you.
One popular alternative to getting a business loan, particularly for product-oriented businesses, is crowdfunding. Crowdfunding soared into popularity via platforms like Kickstarter and Indiegogo, which were specifically created to fund product design, manufacturing, and distribution. This model won’t help much, though, if your business is service-oriented, rather than product-focused. Or if your product is unlikely to have the necessary broad appeal for meeting crowdfunding goals.
Another way you may be able to fund your startup is via cloud funding. Like crowdfunding, cloud funding relies on making online connections to fund your business. In this case, though, the idea is to attract investors via your online pitch. These funders then have equity in your business and hope to turn at least a small profit. Be sure you understand any securities restrictions on how you can use cloud funding. Do this before you launch such a campaign, however, as soliciting investors is a regulated practice.
There’s no one right way to fund a startup. Yet investing by taking out a personal loan won’t help your business put its best foot forward. Instead, it can damage your personal credit, diminish your ability to establish a business credit line, leave you carrying unnecessary debt, or even cause you to file for bankruptcy. The fact is, the early days of a business are always uncertain. So why put your whole future on the line when there are other ways to fund your startup?