Small businesses power the Canadian economy, with the majority of employers falling into this category. If you’ve ever dreamed of owning your own business, you can take heart that Canada supports more than a million small businesses.
A great business idea isn’t the only thing you’ll need to get up and running, though. You’ll need a business plan too. Even more important, you’ll need the right funding to help you ensure success.
You might be wondering about your funding options, including a personal loan for business. Is it a good idea? This guide has everything you need to know.
What Is a Personal Loan?
Before you decide if a personal loan is the right choice for business funding, it helps to understand what a personal loan is.
Personal loans are extended to you as a person, rather than to a business. They can be almost any type of credit:
- A renewable line of credit
- A credit card
- A term loan
The biggest difference between a personal loan and a business loan is that a business loan is made out to your company. If you haven’t set up a formal business entity, you may not be able to access other small business funding.
Once you register your business or incorporate, you can take out loans in the business’s name. Some business owners use personal loans even if they have access to business finance.
Personal Loans vs. Business Loans
Given that personal loans are made out to you as an individual, you might wonder if you can even use these funds for your business.
The answer is usually yes, provided that the loan doesn’t have restrictions on what it’s used for. An example might be a car loan. You can’t use a car loan to fund payroll for your business.
Many personal loans don’t have use restrictions on them. That means you can use a personal loan to start a business or fund other expenses.
As mentioned, the personal loan is extended to you as an individual. The business loan is extended to the business. This creates a difference in who handles repayment of the funds.
If a loan is extended to the business, then the business handles paying back the loan. If the business is a limited liability company, the lender will have a harder time coming after your assets if the business can’t pay back the loan.
With a personal loan, you’re responsible for paying the debt back. Even if the business goes under, you’ll still need to repay the loan.
Personal Loans Affect Your Credit Score
If you take on a personal loan for small business use, you assume the risk of the debt personally. That also means the loan affects your personal credit score.
A business loan affects the business’s credit score. As the business owner, your personal credit score may be considered when you apply for a business loan.
In short, when you take out a business loan versus a personal loan, you’re better protected from assuming responsibility for the business’s debt.
When a Personal Loan for Business Makes Sense
If business financing is available to you, it’s often the better choice. A business loan may offer you:
- More protection from the business’s debts
- A lower business interest rate
- Specialized business products, such as an equipment loan
- A higher loan amount
This isn’t always true, though. It can be difficult to access business funding, especially for small businesses. If your business doesn’t have a credit history or can’t show profit statements for the last five years, lenders may not want to offer you a business loan.
For many Canadian small business owners, personal loans are much more accessible. If a lender turns down a loan application for your business, you may have better luck getting a personal loan.
In fact, if you have a lengthy credit history and a good credit score, you may actually get a better offer if you apply as an individual. The lender may offer you a higher amount or a lower interest rate as an individual applicant.
The Issue of Registration
If you’re just starting a business, you may not have formally registered it. Some business owners operate informally for years before registering a name or incorporating. You may not take these steps to formalize the business until you need to hire your first employee or you need to access financing.
Many small businesses can be started without much overhead or capital. You may not feel the need to take these formal steps. You may want to wait until the business is more established.
In these cases, small business personal loans may be the only financing option available to you.
Weighing Your Options
So, does it ever make sense to get a personal loan for business use? In many cases, it makes a lot of sense.
In some cases, personal business loans may be more accessible or offer you better terms. In other cases, they may be the only option available to you.
Before you take out a personal loan for small business, though, make sure you explore all your options. Taking on personal debt to fund your business isn’t always the right move. A business loan can help protect your credit score and your personal assets.
You should also explore the different lenders out there. Today, you don’t need to worry if the bank turns you down for a loan. There are plenty of choices out there, and the right lender will help you find the right financing.
Funding Is Key to Success
Making sure you have the right funds behind your business is key to getting your idea off the ground. Whether you’re just starting out or trying to expand, a personal loan for small business is one option you can always consider.
Wondering about other financing options? Get in touch with the experts. See the difference the right funding can make for your business and your personal life alike.