Should You Use Unsecured Personal Loan for a Startup?

Consult with DoctorTaking out a loan can be a risky move. However, it is sometimes the best option in some circumstances, like when you want to start your own business, but you do not have enough for the required capital. The most common option for business people is usually to go to the bank to apply for a business loan. The problem with this is that not everyone’s loan applications are approved.

That’s when personal loans come in. Entrepreneurs usually apply for personal loans when they want to get more creative, but are not successful when applying for a business loan.

There are two types of personal loans– secured and unsecured. A secured loan gets support from your assets, which the bank can seize in the case that you fail to pay it. On the other hand, an unsecured loan gets issued based on your creditworthiness. You don’t need to have any asset for the creditor to grant you your application. You do however need a very high credit record and will more than likely be charged a higher interest rate because the risk to the lender is higher that that of a secured loan.

The question we’ll have to answer today is this– Is using an unsecured personal loan for your business wise? To answer that, here are things that you should know about it.

  1. Debt interest

Unsecured personal loans, especially those who are actively sold to you, usually amount to larger sums since you will not be able to properly monitor how much you have spent. Not only that, you will most probably be forced to drag it out for a longer time in order to increase debt interest. If you are taking a loan for your business, you most probably need a large amount of money. This would mean, larger interest. In terms of interest, you could say that unsecured personal loan is not the wisest option. Also, watch out for fixed interest rates.

  1. Over payments

Over payments mean that you are not charged with interest when you pay the whole loan before the set time. These generous terms are not applicable to all loans, but you can find them on selected unsecured personal loans. Just make sure that when you get this benefit, you read the fine print carefully before signing the papers and taking the loan. In this case, it’s actually beneficial for your startup.

  1. Privacy Policies

If you’ve decided to actually take an unsecured personal loan, make sure that you read their Privacy Policy. There are companies that reject your application, but pass it to other lenders instead in order to get commissions. This is dangerous, especially when your startup’s information is involved.

  1. Banks

You’ve probably heard this before, but I want to point it out again– don’t trust your bank. It may seem that they have your business’ interest in mind. However, that will rarely be the case. After all, they can profit more if they are to get better interest rate. Compare offers from several banks before settling on one.

  1. Gimmicks and Tricks

It’s not uncommon to meet agents who secretly create gimmicks to trick you into getting more expensive loans. Watch out for loans with cashback and payment holidays. You don’t want to start your business on the wrong foot. Even big business go bankrupt when financing strategy is poor.

Final Thoughts

If you are a starting entrepreneur, there’s no harm in increasing your budget by using personal loan. Just make sure that you’ve done your research and weighed your options well. What may work on one businessman may not work on another.

If you have any questions, please ask below!