Can a personal loan fuel your entrepreneurial journey? Here’s the truth | Mint

The desire to be your own boss often fuels the ambition for wanting to start your business. Of course, this kind of financial approach might seem convenient sometimes when you’re a little low on cash, while personal loans require careful considerations of both benefits and disadvantages before choosing to borrow money from others.

What are personal loans?

Personal loans are types of unsecured borrowings. The borrower can utilise them for quite a number of things such as emergency medical costs, debt consolidation, home improvements, and travel. Because personal loans don’t require any collateral, the money can be accessed immediately. Before applying for a loan, though, borrowers must think about several things like interest rates, which generally range from 9.99% per annum to as high as 44% per annum, terms of repayment, and costs related to getting a loan.

Why take out a business personal loan?

For business needs, personal loans are attractive since they

• Collateral is not needed: In order to obtain a loan, you are not required to pledge any assets.
• Easy to acquire: The approval procedures are less complicated than those for business loans.
• Relies on credit scores: A good personal credit history is often sufficient for eligibility.

Pankaj Sharma, CEO, Religare Finvest, expressed his opinion that if it is a good idea to take a personal loan for business or not, “Using a personal loan for business purposes can be a worthwhile option for many entrepreneurs. For MSMEs in particular, personal loans help bridge funding gaps, enabling them to invest in growth opportunities, manage cash flow, or cover unexpected costs. They provide quick access to funds, which is essential for immediate capital for inventory, equipment, or operational expenses. However, interest rates are higher, and the repayment terms are shorter.”

Eligibility requirement for a business personal loan

Debtors generally require:

1. Good credit score: An indication of a good credit standing.
2. Low debt-to-income ratio: It suggests that debts are managed in a healthy proportion.
3. Reliable source of money: Indicates consistent ability to produce earnings.

Personal loans cannot have information such as credit ratings, business revenue, and operations history. Thus, it tends to be easier to acquire among business loans for new business owners.

Difficulties of obtaining a business loan

Although they are easy to access, there are a few drawbacks to be considered:

1. Requirements for credit score: Owners of small or very small businesses and new companies cannot possess a personal credit score which will be the authorisation to provide them a loan. To obtain high credit scores takes time and dedication with proper financial habits.

2. Income limitations: Your income determines your eligibility for loan repayment, according to lenders. Companies that don’t post profits may have a challenging time acquiring loans.

3. Weak business profile: Even when applying for a personal loan, lenders may consider a venture to be risky if there is minimal capital investment or no business experience.

4. Unsecured character of loans: Personal loans do not require collateral because they are unsecured. Even though your assets are at a lower risk, this often leads to higher interest rates, which increases the overall cost of borrowing.

In conclusion, personal loans could be a relatively easy cash injection for an enterprise. However, before entering such a loan, proper care needs to be exercised in order not to face risks greater than the benefits, such as higher interest rates, burdensome debt, and the prospect of ruining personal finances. When weighing pros and downsides, consulting with an expert financial advisor will help one make good decisions that benefit one’s enterprise for the long run.

(Note: Raising a personal loan has its own risks)