Cons of Taking a Personal Loan for Business Purpose

25 Aug 2021

Business loan can be great cash injections and can provide the seed capital needed to grow your business. However, they are not always easy to obtain, especially compared to personal loans. So, most entrepreneurs end up taking personal loans for business purposes. But, is the personal loan good for business purposes? That is something that entrepreneurs need to explore before choosing between business credit and a personal loan.

What is a Personal Loan?

A personal loan is an all-purpose, unsecured type of loan. You can avail personal loan for several reasons without providing any collateral as security against it. First, a personal loan is a great way to get quick financial assistance in a financial crunch. You might have enough funds as savings; however, in some situations, you might find yourself in need of some extra funds. By availing a personal loan, in addition to giving you instant cash, you get access to numerous benefits that come with it. For a personal loan, you would not have to provide any of your personal assets as collateral. It is always better to get a personal loan instead of borrowing from family and friends. 

Disadvantages of Personal Loan

  • Since no collateral is taken against it, the interest rates are relatively high compared to a business loan
  • The amount granted as a personal loan is comparatively less as compared to what can be availed by other types of loans
  • You need to have a very good credit score to qualify for a personal loan

Cons of Using a Personal Loan for Business Purposes

#1: You risk your personal credit

When you take out a personal loan for your startup, you put your credit on the line. If your business fails or you fall behind on your payments, your credit score can plummet. A low score and a history of late payments can make it more difficult to get approved for other forms of credit.

Even if you make all your payments on time, a personal loan can hurt you in other ways. For example, taking out a loan raises your debt-to-income ratio, making it more difficult to qualify for other loans or credit cards for business requirements.

#2: Lenders limit how much you can borrow

Personal loans have much lower maximums. You might not be able to find a lender willing to loan you a higher amount. If your business needs are extensive, a personal loan might be inadequate.

#3: You could pay sky-high interest rates

Although personal loan lenders advertise low rates, they reserve those rates for applicants with excellent credit scores and high incomes. If your credit is less, you might be stuck with a loan with an interest rate as high as 35.00%, which could cost you a significant amount of money.

In Summary

Judging from the above comparison, choosing between a personal loan and a business loan is indeed a difficult decision. If you are comfortable with high-interest rates and short loan tenure, a personal loan is the best option for you. However, suppose you want to avail a significantly larger amount and enjoy benefits such as tax exemptions and deductions on your loan. In that case, opting for a business credit makes more sense.

Oxyzo makes it easier for businesses to obtain credits to manage their working capital requirements. Choose Oxyzo as your business financial partner.