When starting your own business, you may have to rely on external funding. Perhaps you qualify for a personal loan, but would it be better to take out a business loan instead?
We got in touch with a specialist to find out whether it’s best to take out a business loan or a personal loan to assist you with your ongoing business or start-up.
Start-ups may have to rely on personal loans
Brett Nadasen, business development manager at Finfind, explains that it may be challenging for start-ups to qualify for business finance.
“This is because of the risk of funding start-ups. Many funders are hesitant to lend money to a company that cannot demonstrate a history of generating revenue,” says Nadasen.
“Often taking out a personal loan or funding the business personally in some way, shape, or form is the only method to get a start-up going,” he adds.
However, he cautions that although it may be your only option, you must be mindful that monthly repayments have to be made, so you’ll have to generate enough revenue to repay the loan.
This will have to be done over and above operational expenses, and it will have to be maintained for the entire duration of the repayment term – which can be up to 60 months.
Nadasen recommends only resorting to a personal loan if there’s a secured contract in place. He says that if a contract is available, the following tips could be useful:
- Ensure that the loan repayment period is equal to or less than the contract term – it should ideally be shorter.
- Pay special attention to the interest rate applied to the personal loan. Don’t take a loan with an interest rate higher than your mark-up for your product or service.
- Ensure that the loan provides the option of early settlement of the outstanding amount, sooner than the term of the loan. Enquire about the cost or penalties applied in this case.
- Make sure the company you’re taking a personal loan from is registered with the National Credit Regulator or the Financial Services Conduct Authority. Don’t borrow from loan sharks or anyone not registered.
Taking out a business loan instead
According to Nadasen, the majority of funders will have an application form that must be completed. However, funders have varying requirements in respect of supporting documentation. For example, some may require a business plan, annual business financials, and projected financials.
“A business loan allows a business to provide its product or service during a period of cashflow constraints with little disturbance to the operations of the business,” says Nadasen.
He adds that it can provide opportunities to grow and expand the organisation and secure new business contracts, which may require an initial investment from the company.
“A business loan should never be taken for purposes that aren’t an operational requirement. For example, to buy assets that you might need in future, but not at this present moment,” says Nadasen.
In general, he has the following advice for entrepreneurs regarding funding for their businesses:
- Keep your documentation up to date and on hand. You will not get any funding if you can’t produce the required documentation.
- Never borrow money without having a solid financial plan to repay it. Consult your accountant if you’re not sure.
- Take whatever credit facilities your bank offers you when the going is good, even if you don’t need it. It’s better to have credit you don’t need, than to need credit you don’t have.
- Saving money is not just for people. Put money generated by your business aside every month, so that one day you don’t need a loan.
- “Fake it until you make it” may be your style, but don’t fake the size of your bank account. Having a lifestyle that makes you look like you have more money than you do is a sure way to bring your business to an end.
Written By Isabelle Coetzee – 22 Jan 2020