Do Personal Loans Affect Business Financing

Growing a business is tough work, especially if you’re strapped for capital. A quick and easy way to get some immediate cash is by applying for a personal loan. You can use this type of loan for almost anything, business funds included.

That being said, not many people are aware of the symbiotic relationship between personal and business financing. If you handle your personal loans strategically and pay them on time, you can benefit from access to better business financing plans.

Conversely, if you don’t pay on time or in full, then you can suffer some consequences that can stifle your business venture’s growth potential.

As an entrepreneur, you need to be on top of your finances and ensure that it’s in a healthy state as much as possible. Failure to do so can be disastrous to not only your business outcomes but your personal life as well.

If you want to know more about how personal loans affect business financing, read on for some deeper insights. Staying on top of financing makes it easier for you to achieve business success and financial success more readily.

Let’s begin!

Personal Loan and Business Loan: Key Differences

A personal loan and a business loan both provide you with a lump-sum payment, but there are a couple of differences that set them apart.

For one, a personal loan can be used at the discretion of the borrower for anything they want. For instance, it can be used to cover both personal and business expenses or just one of the two.

This flexibility is especially useful for people who don’t have an established business reputation yet or have a low credit score that prevents them from applying for business loans. Common uses for a personal loan are debt consolidation and home improvements.

On the other hand, business loans are payouts that are meant specifically for business purposes. This can mean acquisitions, cash flow improvements, or operational expenses. 

Banks, credit unions, and online lenders can provide both these type of loans to eligible applicants.

Typically, business loans have more favourable terms and a more generous lump-sum payout than a personal loan. This is because successful business loan applicants tend to have a good credit history, which reassures lenders that they won’t default on their payments. They may also be secured, which means that the borrower will offer collateral in case they default.

Conversely, personal loans are often unsecured and have looser regulations on who can borrow. The drawback is that the maximum limit is often smaller than that of a business loan. Interest rates and term length may be higher too.

That said, each loan provider will have slightly different agreements on their contract whether it’s the term length, interest rate, or another particular guideline. Be sure to vet each contract so that you can pick the most suitable one for your business needs.

What are The Different Personal and Business Loan Options?

Here’s a rundown of the types of personal loans you can come across:

• Unsecured personal loans
• Secured personal loans
• Personal lines of credit
• Credit cards

On the other hand, these are the more common types of business loans:

• Term loans
• SBA loans
• Business lines of credit
• Equipment Financing
• Invoice financing

How Personal Loans Impact Business Financing

As previously mentioned, personal loans can be used for business financing. It may offer less competitive rates, but for people who want cash immediately, people who don’t need too much cash, or those who don’t have a high enough credit score, it’s an option that can be effective in the meantime.

That said, running a large-scale operation will eventually require you to seek out more formal and higher-ceiling lending channels for your business. So before you apply for business financing, it’s essential that you maintain a clean track record of your personal loan payment history.

There’s one main reason why your lending track record should be squeaky clean: your lenders will request a detailed history of your previous loan applications, and base your loan quotation and terms on it. Both personal and business loan lenders will look at your personal loan history and credit score.

If you have a good credit history of on-time and complete payments, you can increase your chances of getting favourable business loans. 

Conversely, if you have a history of non-payment (or worse, have a history of defaulting), then your odds of getting accepted for a favourable business loan plummets quite considerably. You could be seeing higher interest rates, shorter repayment terms, and lower borrowing limits.

As such, it’s essential for business owners like yourself to monitor your personal credit scores often. This way, you can nip problems from the bud before they occur, thus improving your business’s ability to secure adequate and decent funding.

How to Improve Personal Credit for Better Business Financing

If you want to improve your chances of securing a good business financing deal, then you’ll have to prove your financial capability to the lender(s) that you plan to approach.

This can be done in multiple ways. Here are some ways you can improve your credit to secure a better financing deal:

1) Submit Complete Documents During Your Loan Application

First things first, ensure that you’ve filled out and compiled everything you need to process your loan application. Failing to submit even just one document can lead to a quick rejection, which can be an ultimate time waster.

To know the entire list of documents you need, consult with your lending provider. The most common requirements include your financial statements, tax returns, IDs, business plans, and a business registration certificate.

Be sure to submit clean and organised copies of the requirements to highlight your preparedness and seriousness with the application. This can lead your lending provider to view you less as a risk, which can ultimately raise your odds of getting loan approval.

2) Pay Debt on Time, Always

You need to pay your debts on time to maintain a good credit score. It’s the number one most important thing to do to secure business loan approval, and for many businesses, it’s frankly one of the hardest things to do.

Regardless, making regular, on-time payments is crucial to increasing your credit score, which can help in securing better business finance deals. It signals to lenders that you can afford to take out a loan and that you’re capable of paying it back.

If you don’t pay your debts on time, you can severely damage your credit rating, causing you to have a limited number of lending options.

The best way to stay on top of your debt obligations is by automating your debt payments. 

Simply request your bank provider to automatically withdraw a debt amount and pay it to the respective biller. Alternatively, you can also use industry-specific software like the best NDIS software to track billing and make debt repayments easier.

This way, you won’t accidentally miss repayment periods and ultimately harbour a strong sense of discipline in paying off debt.

Unsurprisingly, the next point will relate to this one.

3) Avoid Taking Too Much Debt at Once

Excessive debt can signal to lenders that your business is over-leveraged, meaning it’s running on massive piles of debt. This can signal business instability due to you being at a high risk of defaulting at any given time.

In such cases, lenders may reject your application or require you to pay higher interest rates to compensate for that risk. 

Of course, the best way to avoid facing this issue is by being prudent when managing debt. Debt consolidation can be effective if you manage it properly. That said, only get it when you need it, and as much as possible, avoid getting more debt if you’re at risk of nonpayment. 

4) Maintain a Mix of Credit Types

Another way to get on the good side of lending corporations like banks is to highlight the fact that you’re managing different credit types. This includes business lines of credit, instalment loans, and traditional business loans, among other types.

While you definitely don’t want to bite off more than you can chew debt-wise, having a diverse range of credit types (with historically good repayments) shows that you’re financially literate and responsible in managing various forms of credit.

Balancing multiple types of loans can be advantageous when applying for a future loan, particularly if you have been handling them for a long time.

5) Submit Accurate Credit Reports

Lastly, ensure that your credit report is submitted on time and free from errors and discrepancies as much as possible. 

Outdated and wrong information can lower your credit score, which can lead to loan rejections or less favourable loan terms.

You may contest errors with your financial provider to ensure accuracy. You may also hire a financial specialist to look over these business errors in your stead.