Personal loans vs business loans – which is best for your startup?

loan contract approved

Despite the wider concerns across the global economy, entrepreneurship continues to thrive.

Sometimes, it takes a crisis to push us towards taking a major step, and the belt-tightening taking place in so many major businesses is proving to be a driver for many to take the plunge and set up in business on their own.

In today’s online economy, many small businesses can operate entirely in cyberspace, so startup costs are less prohibitive than they once were. However, it would be disingenuous to suggest that you can launch a successful startup with pocket change. If you need capital for your startup, some sort of loan is the natural choice. So what’s available?

Can you get a business loan?

A business loan is the obvious solution, but with lenders under the same pressure as everyone else, eligibility can be a stumbling block when you are just starting out. With no track record to rely on, you will need to have a solid business plan and a cash flow forecast that will stand up to the tightest scrutiny.

If you can successfully negotiate those hurdles, a business loan is ideal, as it will bring peripheral benefits. For example, many banks will also provide business support as part of the deal. Having the loan and keeping up with the repayments will also allow your fledgling business to start creating its own credit history.

The major pitfall here is that there is no guarantee your application will be accepted. Keep in mind that the bank will most likely look into your own personal finances when making their decision. If your credit rating is anything less than good, they are likely to see you as an unacceptable risk.

Personal loan options

The great thing about personal loans is that there is far more flexibility and choice. Even if your credit score is on the poor side, there are always possibilities, especially if you only need a relatively small amount to get started. For example, SMS loans are a convenient, quick and involve few questions. These are particularly popular in Scandinavia, where they are known as bästa smslån. Of course, as the lender is taking on higher risk, you have to pay more interest, but this sort of loan is well worth considering if you need up to around £2-3000.

Whatever type of personal loan you consider, you need to double check specific conditions as to how you can use the money. Most lenders don’t care as long as you make the repayments, but there are some loans that stipulate they cannot be used for business purposes.

Other options

Finally, keep an open mind as to other financing options. These days, there are plenty of alternatives to loans, such as invoice financing, crowdfunding, venture capital and so on. It will pay dividends in the long run if you take some time to explore all of these options before committing yourself to a loan on the basis that it is the only one available.