Things to Keep in Mind When Taking Personal Loans for Small Business

Personal loans are those unsecured loans that are given by the banks and financial institutions, which are not backed by any collateral normally and are given without attaching a specific purpose to it for its utilization. Such loans are given purely on the basis of your credit score, credit history and also on your long-standing account history with the particular bank. Here are things to keep in mind when taking personal loans for small business:

Criteria Considered by the Lenders

Since personal loans do not normally carry any security for the lenders, they are cautious in sanctioning such loans. As such, they rely upon your future monthly incomes to take a decision on advancing you such loans. For this, they will take into consideration your existing loan repayment history, along with already existing loan commitments. Besides this, a low credit score may sometimes call for rejection of your personal loan application.

Why are personal loans helpful for small businesses and startups?

Things Personal Loans Small Business

With the changing preferences of the Nation’s youth, several new-age technologies and consequently, startup companies are coming up. However, considering the novel and fresh business ideas, bankers are not much willing to lend against an untested business idea. Personal loans emerge as the best thing to do then, as such loans can be raised on your personal credit strength. Instead of analyzing your business projections, lenders will be more willing to judge you instead of your business to sanction you a personal loan. Further, they may not insist upon providing a collateral security against such loans.

Costs attached to Personal Loans

Personal loans come in handy when you are looking for finances for your startup/small business. So, while personal loans may be slightly costly than a regular business loan, the ease embedded with availing a personal loan may outweigh the costs attached.  Further, some people tend to utilize their credit card limits when in need of funds, considering it as an equivalent of a personal loan availed from a financial institution. However, credit cards carry a higher interest rate. Also, in case the borrower can provide a collateral security in the shape of bank’s term deposits, the interest rate can go as low as just 2% above the term deposit rate. So, in today’s low-interest scenario where the FD rates are low at around 6-7%, you can avail a personal loan at 8-9%.

Applying for a Personal Loan

Things Personal Loans Small Business

Once you decide to take a personal loan for business, here are the steps you will need to follow:

  1. Check your Credit Score – Checking your credit score before applying for a personal loan will help you have a fair idea if your application may be considered suitably or not. Your good credit habits and better credit score is the primary barometer for the lender to consider sanctioning you a personal loan.
  2. Analyse Borrowing Options in the Market – You may like to compare the interest rates offered by various banks for personal loans. You might be surprised to know the wide range of the interest rates being offered by various banks and other lending institutions like Money View. Further, with the evolution of technology, Peer-2-Peer (P2P) lending platforms have also emerged as a choice. You may choose your lender after considering the costs, turnaround time for sanctioning the loans and also your ease of servicing the loan.
  3. Preparing Documentation and Application – This is the final step for availing a personal loan and follows once you have zeroed on the lender for your loan. You may be required to provide sufficient documents to substantiate your loan application and loan repayment capacity.

Take care, even after you have availed the Loan

Once you have availed a personal loan, it becomes all the more important for you to take care of the connected repayment obligations, as this loan has been raised on the strength of your own credit history. Any success/failure of the business is of no consequence to the lender. So, make sure you make all the repayments on time and don’t let your credit rating get impacted. Being an unsecured loan, any default on timely repayment of such loans can significantly downgrade your credit score.

Personal loans can come handy in times of need but may be resorted to only once you have exhausted other available funding options. Have you taken a personal loan for small business? Share your experiences below.

Simardeep Singh


Simardeep Singh is a Chartered Accountant based in Delhi. He loves sharing his knowledge about personal finance and investment.