Is Personal Financing a Good Way to Fund Your Small Business?

There are many ways to fund commercial ventures. Some entrepreneurs stake personal savings to launch an enterprise. Other would-be business owners turn to friends and family for investment capital. Still others rely on traditional financing methods offered by banks, credit unions, and conventional brick and mortar lenders. In today’s diverse finance marketplace, small business entrepreneurs also have access to an increasingly visible source of commercial funding, made available by alternative lenders, primarily operating online.

When evaluating your business funding choices, it pays to consider every available option, with an eye toward value, risk, and payback requirements. Choosing the best type of financing for your business needs accounts for circumstances and conditions such as your personal credit strength and business history, as well as the dollar amount you’re seeking.

Selecting a personal loan, drawn against your individual finances, makes more sense than securing a business loan in some cases, so non-commercial lending should be considered, along with business-only funding. An article recently shared on the website, entrepreneur.com, helps sort out the pros and cons of various business finance alternatives, addressing the question: Should you take out a personal loan to fund business spending?

Lending Irony

Business owners with experience seeking funds are aware of an ironic trend, which seems to run counter to the process. In the conventional commercial lending marketplace, the most highly qualified applicants are those businesses with strong financials and/or a long track record of profitability. Startups and fledgling ventures, on the other hand, are largely excluded from access, because their performance is unproven in the eyes of traditional lending entities. The result for many businesses, particularly ventures just getting off the ground, is impasse with traditional commercial lenders.

Personal versus Commercial Financing

Conventional and alternative commercial financing are ideal sources of funding for businesses in need of startup and/or operating capital. As Jared Hecht points out in his recent entrepreneur.com piece, commercial avenues don’t always pan out for business borrowers, leading them to explore other options – including personal loans.

Traditional business lenders furnish cash for specific purposes, so they require detailed information about how you plan to use the money, once approved. Applicants with little or no experience in a particular industry are viewed as high risk candidates, so they are often passed-over for business loans. When the door closes on traditional commercial funding, committed entrepreneurs may instead turn to personal loans, for their business capital needs.

Personal financing is advantageous, because you are free to spend loan proceeds, as you wish. Rather than relying on your ability to succeed in business, personal lenders are more likely to focus on your past performance managing credit. They want assurances you’ll pay back your personal loan, so lenders look closely at your household finances and credit report.

Are You Eligible?

A good credit score and a balanced debt to income ratio both work in your favor, qualifying for personal financing. Unfortunately, if your credit history is poor, or you’re already saddled with substantial debt, you may not be eligible for a personal loan.

Because you’re asking for personal funding, your business plans or status are not germane to the loan application process. Instead of compiling business financials and precise plans for your venture, expect to submit the same types of documentation you’d give a mortgage lender. Proof of your identity, recent pay stubs, current returns and other tax documents, as well as a few months’ bank statements are required when applying for a personal loan.

When Personal Financing Makes Sense

Securing a business loan is usually your best bet, financing a commercial venture, but a personal loan serves as a worthy stand-in, under some circumstances.

• Lack established business history – Commercial lenders are more likely to embrace your application when you have experience or need money for an existing, successful business. New ventures and those without a profitable past may have better luck with alternative lenders, compared to conventional business bankers. After both of these funding paths are explored, without striking a deal for commercial financing, a personal loan may be the next best strategy for acquiring funds.
• Don’t need a large sum of money – Using a personal loan to fund business expenses is similar to investing your own money into a business venture. In the case of businesses requiring a relatively small amount of capital, personal loans present an efficient means for acquiring cash.
• Insufficient collateral – Inventory, real property, and other business assets are viewed as collateral, reassuring commercial lenders you have the means to repay a business loan. Because many personal loans are issued without strict collateral requirements, business owners without enough assets to guarantee a business loan may have better luck pursuing a personal path to funding.

Acquiring capital for a commercial enterprise is not as straightforward as is qualifying for a personal loan. Entrepreneur.com points out that credit reporting isn’t as consistent in the commercial lending industry as it is for consumer financing. Though each industry relies on information from three major credit bureaus, data for businesses may not be as reliable as personal credit reports. This noted difference can itself work against commercial applicants, but it isn’t the only hurdle to clear, landing a business loan.

Commercial lenders may reject your loan application for various reasons, or a combination of factors related to the length of time you’ve been in business, the amount of revenue your venture generates, and your history managing commercial debt. If your business fails to meet conventional or alternative commercial lending standards, a personal loan may provide the financing you need to fund a startup or capitalize your existing small business.