Starting a business is not a cake-walk on a straight road but a path full of twists and turns. As it is said the biggest challenge is to begin, the biggest hurdle lies in raising the requisite capital for your startup. Bootstrapping is not always an option and while investors are a good source for both funds and mentoring, it takes a lot of time, effort and convincing on your part to make them take an interest in your business. Your business proposal should be well-tailored, you must have conducted in-depth market research and your business revenue model must be promising as well as visionary. The same goes for business loans. Then how to arrange the funding? Well, you can simply go for a personal loan. The loan approval is solely based upon your personal creditworthiness and the disbursal of funds is done within a few snaps of fingers.
Start-up and Personal Loan
Since you do not need to specify the reason about how you are going to utilize the funds generated by the means of a personal loan, you can use it for any purpose, even for funding your business. The loan process is simple involving minimal documentation (you just need an identification proof, address proof, and income proof) and verification. There is no requirement to pledge any of your assets and the funds are transferred to your account in no time. However, the interest rate for a personal loan is comparatively higher than what will be offered to you in case of a small business loan.
The stats are not your best friend when it comes to establishing your startup. According to a recent report published by the IBM Institute for Business Value and Oxford Economics, with the title “Entrepreneurial India,” 90% of the startups fail within the first five years in India. Going for a personal loan for starting a business under such scenarios doubles the risk. On one side you will bear the burden of the loss of investment funds and on the other side will be a tarnished personal credit flow. This justifies Mark Cuban’s words, “Only morons start a business on a loan.”
What Cuban implies to say is that while going for a loan if you have steady income inflows is a good idea, availing one at a time when you are risking your entire income for establishing an enterprise of your own can prove to be deadly. Therefore, you must secure both- your income sources as well as your personal credit lines before adventuring into the treacherous waters of availing a personal loan for a business.
Benefits of Taking a Personal Loan for Starting a Business
Availing a personal loan for starting your business could be a good idea as a personal loan comes with many benefits attached to it. These include:
The eligibility norms for a personal loan are simpler than those of any other business loans. The eligibility for a personal loan depends on factors such as age, occupation, income, employment & income stability, residential status & stability, credit score and number of dependents. You do not need to present your business proposal and revenue model for availing a personal loan for starting your business. Its approval is mainly dependent upon your net monthly income and credit report.
Instant Disbursal of Funds
Since a personal loan does not involve much documentation and verification, the approval process takes an average of 24 to 48 hours and funds are transferred instantly into your personal loan account. This makes this loan the fastest method to arrange funds for meeting immediate cash requirements of your business.
No Requirement of Collateral
As most personal loans are unsecured loans, you do not necessarily keep a valuable asset as security with the bank. Therefore, you can enjoy business funding without the fear of losing your asset.
Disadvantages of Taking a Personal Loan for Starting a Business
Using your personal loan for business purposes can bring in many adversaries and can land you in difficult waters. Some of the disadvantages are listed below:
Risking Your Personal Credit
As already mentioned in the article, starting a business is a risky affair and taking a personal loan for starting your business can damage your personal finances. Since a personal loan is taken by an individual, you need to repay the loan even if your business fails to operate. Therefore, there is a lot at stake while going with the option of taking a personal loan for starting a business.
While your business requirements may increase from time-to-time, a personal loan provides limited access to funds. While some banks like HDFC Bank can offer a personal loan of up to Rs. 50 lakh, most banks do not lend over Rs. 20 lakh in case of a personal loan. Therefore, a personal loan may not meet all your entrepreneurial requirements.
High Rates of Interest
Personal loans being unsecured are risky for lenders and they, therefore, charge very high rates of interest for personal loans. Depending upon the creditworthiness of a borrower, some banks can even charge interest at rates as high as 26%.
Things to Take into Consideration Taking a Personal Loan for Starting a Business
There are certain factors that you must keep in mind while opting for a personal loan for startups. These are:
Debt-to-income ratio is one of the primary factors that lenders take into consideration while processing your loan request. This ratio indicates your ability to manage loan repayment. Normally, a debt-to-income ratio of greater than 43% is considered good by the lenders. You must ensure that you have a good debt-to-income ratio otherwise even if your loan application gets approved, the EMI payment will exhaust all your monthly income and all you will be left with is peanuts, and it will become impossible to manage your monthly expenses.
Credit score is another crucial factor that helps a bank decide upon the various aspects of your loan request. The bank often offers a high interest rate to individuals having low credit scores. Therefore, you must check your credit score before proceeding with your loan application as there are chances of rejection if you are at the lower side of credit score.
Should You Start a Business with a Personal Loan?
While starting a business with a personal loan is not an entirely bad idea in itself but overlooking the various how’s and what’s is like skating on the thin ice. You can go for a personal loan for starting your business if you have a stable income source, a good credit score and a high debt to income ratio. If you do not have a decent credit score or a debt-to-income ratio of at least 45% and still opt for a personal loan, you are opening a pandora box as your business will not start generating huge returns immediately after coming into operation. It will take a lot of time to start earning profits. You must ensure that you can manage your debt repayment till the time your business is still making its mark otherwise a personal loan availed at a high interest rate will exhaust all your income.