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Finance

Can You Use a Personal Loan to Fund a Startup?

Starting a business can require quite a large initial investment. A lot of businesses thus use a loan to get things going – but can you use a personal loan to fund a startup? In short, the answer is yes. However, you need to examine several things before you take the plunge. Let us examine some of them here.

  • Why a personal loan?

A business loan makes a lot more sense on the face of it, so why opt for a personal loan at all? It is because obtaining a business loan for a startup is difficult compared to having a personal loan approved. These days, you can look up personal loan interest rates, there are tools like a personal loan EMI calculator which will show you what your EMI will work out to be, and you can apply for a personal loan online, which is not always the case for a business loan.

  • What should you know before applying for that personal loan for your startup?
  • Does the lender allow you to use your personal loan for a business? Read the fine print carefully, or simply ask your lender outright. Lending to a business with little or no history is a high-risk proposition to a lender so it might not allow you to use a personal loan to fund a business, and ask you to repay the amount immediately.
  • Will the lender require collateral for the personal loan if it is a large amount? If yes, then you are putting your assets up as collateral, and if you do not manage to repay the loan, your assets can be repossessed by the lender. If your assets include collateral like your house, you first need to discuss with your family to make sure they are comfortable with such an arrangement.
  • Who is liable for what amount? If you’re starting up a business with a few partners, read the fine print well. Say four of you apply for a Rs 40 lakh loan – does it hold each of you liable for Rs 10 lakh, or does it hold any of you liable for the full amount? Because if three then default on the payments, it will be up to the fourth person to make up the deficit by himself.
  • What other advantages can a personal loan offer your startup?

A personal loan used for a business can provide a number of benefits.

  • If it qualifies you for a tax deduction, that will offset some of the amount you need to repay as interest.
  • Applying for a personal loan online is quick and easy, and the money can be credited to you in as little as a few hours from the time you submit the required documentation.
  • If you have a great credit score, you can apply for a larger sum as well as enjoy low interest rates.
  • Shopping around for a personal loan can help you find the best deal possible, since many more lenders are open to approving personal loans.

A personal loan is a risk since it is a debt that you need to repay regardless of how your business performs. However, if you use it wisely, for example, to purchase assets that will help increase productivity instead of using it to cover losses; it will certainly help your business grow and the long-term benefits will make it worth the risk. The easy application process and quick disbursal period are merely icing on the cake. Always remember to borrow only what you need — too little and you run the risk of your project not taking off; alternatively, too much will mean unused cash that you will need to pay interest on anyway. The personal loan application and approval process at Tata Capital is quick and easy, and disbursal is extremely quick if you are eligible. If you have any queries, the FAQs page already answers a lot of questions and will resolve your doubts in a jiffy.