Personal loan: Should you opt for it to invest in business? | Mint

Personal loan is an advance given to someone in need i.e., needs money urgently. This is an unsecured form of borrowing which can be used for an array of purposes which include, but not limited to, emergencies, higher education, business, vacation, wedding, luxury and home renovation.

Aside from these purposes, personal loans can also be used for business as well. Although not a highly advisable thing to do, one can opt for a personal loan to invest money in his business in certain scenarios.

You may decide to opt for a personal loan for business when you need funds on an immediate basis and can’t afford to wait for the loan approval. Additionally, it is recommended to use a personal loan for business when you have a high credit score and can easily secure a low-interest rate.

Alternatively, when your business is too small to be eligible for traditional business loans.

So, when exactly is this a good idea to raise personal loans for business – we list out the key reasons.

When is this a good idea?

A. If you don’t qualify for a business loan due to limited business history, a personal loan may be easier to obtain.

B. Personal loans are usually processed faster than business loans, providing quicker cash flow for urgent needs.

C. Many personal loans are unsecured, meaning you don’t have to pledge business assets.

D. You can use the loan for any business-related purpose (inventory, marketing, etc.) without specific restrictions.

Meanwhile, there are certain situations wherein it is definitely not a good idea to opt for a personal loan when you want to use it for your business.

When it may not be a good idea

1. Personal loan interest rates are typically higher as compared to the secured business loans. So when you can secure a business loan then you may want to avoid it.

2. Personal loans usually give lower amounts as compared to business loans, which can go much higher. Therefore, when you need a big sum, you should avoid taking a personal loan.

3. Your credit score is at risk if the business struggles to repay. Default in payments can affect future borrowing ability.

4. Interest on a personal loan may not qualify for business expense deductions, unlike business loan interest.

(Note: Raising a loan comes with its own risks. So, due caution is advised)