There are many reasons why entrepreneurs might consider using a personal loan for business, from credit constraints to limited access to capital, flexibility, quicker access to funds, and more.
But ethical considerations, psychological factors, potential for higher interest rates or the financial risk associated with making such a choice causes some to avoid doing so when it might, in fact, be the best option for their needs.
For those wrestling with this particular conundrum, this article will help you determine whether using personal loans for your business is a smart move.
As alluded to earlier, personal loans, unlike business loans, are typically used for personal reasons, such as covering the cost of an expensive treatment, making large purchases or even consolidating debts.
It is for this reason that eligibility requirements, loan quantum, and interest costs differ between the two types of loans. To gain a more comprehensive understanding of the two types of loans, you can read our business loan guide here and our personal loan guide here.
In a nutshell, personal loans are loans disbursed into a borrower's personal bank account. They are usually unsecured, with loan tenures that range between 1 - 7 years, sometimes shorter.
Compared to business loans, personal loans typically have higher interest rates due to the risk factors and the unsecured nature of the loans. Lenders will assess risk based on the creditworthiness of the individual whereas business loans are secured by business assets, which reduces the lender's risk.
Despite the high interest rates associated with personal loans, there are several reasons why borrowers might prefer to use personal loans for business purposes.
Personal loans compared to business loans tend to have less stringent requirements. Different financial institutions will have different eligibility standards, but usually the minimum requirements include, being between the ages of 18 and 70, a monthly salary of at least $1,200 and Singaporean citizenship, permanent residency or have an employment pass.
In addition to less stringent requirements, personal loans tend to have quick approval processes. Depending on the loan source, the time it takes for funds to be disbursed can take up anywhere between minutes to a day (for licensed moneylenders) to weeks (for banks).
Personal loans rely on an individual's credit history, not the businesses. This can be especially useful for new businesses without an established credit history or an operational history — a condition necessary to qualify for many business loans in Singapore.
Personal loans offer a greater degree of freedom in how the funds can be used. Unlike some business loans that might have restrictions on how the funds can be used, personal loans allow business owners to use funds as they see fit.
While the advantages of using personal loans for business are significant, there are also potential downsides that business owners must consider.
Personal loans can sometimes have higher interest rates compared to business loans, particularly if the borrower's personal credit score isn't excellent. This can make the loan more expensive over time.
Perhaps the biggest downside to using personal loans for business is the potential impact to personal finances and assets. In the event that the business fails or struggles to make repayments, the borrower's credit score and personal assets will be at risk.
Personal loans generally offer lower loan quantum compared to business loans. This may not be ideal for a business’s needs, especially when it comes to larger projects or significant expansion efforts.
Regardless of whether your business is paying its loans on time, ongoing debt on your personal credit report increases your debt-to-income ratio (DTI). With a higher DTI, you may find it difficult to qualify for other loans in the future, such as vehicle loans and mortgages, until the loan is fully repaid.
In Singapore, business loan interest rates are tax deductible. Personal loans on the other hand, are not tax deductible unless all of the income is used for income-generating purposes. Utilising a portion of the money for personal expenses may introduce complexities in your eligibility for tax deduction. We recommend consulting with experts if this is important to you.
At the end of the day, whether it’s a smart move to use personal loans for business expenses boils down to your individual needs.
If you are facing difficulties acquiring a loan for your business due to some stringent requirement, such as being in operation for a specific amount of time, then a personal loan is a viable choice. The same goes for situations where quick access to funding is critical.
There are a few other scenarios where one might consider opting for a personal loan. For example, if you have a good or excellent credit score, a personal loan might be preferable due to the potential for acquiring favourable interest rates without the need to put up collateral.
Similarly, if you also prefer more flexibility in how the funds are allocated, then a personal loan can be a practical choice.
We hope the information shared helps you make an informed choice that is beneficial to your business. But we’d be remiss if we didn’t mention that the loan industry has come a long way. Today, you’ll find a plethora of business loan products geared towards different situations and needs.
Lendingpot makes this easy. With a single application you can gain access to a wide range of business loan (or personal loan) providers each offering competitive offers. Best of all, it’s completely free. Sign up today and let us help your business achieve its financial goals.
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