Using a Personal Loan for Small Businesses

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There are many times when the lack of available funding throws keys into business goals and an entrepreneur has to borrow money to cover the high costs of goods or services, employee wages, marketing, etc. Anyone who has ever tried or run a small business knows very well that cash flow is a top priority for every business to meet various business needs. All of the recently mentioned costs are an integral part of it especially for those with a small percentage of profit. All of these business costs are the reason why most business owners and entrepreneurs borrow money from financial institutions to finance their businesses, and sometimes they resort to personal loans to cover these costs and business expenses.

While a personal loan can help a small business get the funds it needs to meet the needs of the business, personal loans also involve certain risks for entrepreneurs. This article contains some pros and cons of using personal loans for small businesses that every business owner and entrepreneur should know before applying for them.

Benefits of Using a Personal Loan for Small Businesses
Easier acceptance

Whether it’s a new business or whether you’ve created one properly, it takes time to establish a positive credit score to get a business loan approved by a traditional lender. Many of them want you to show your business plan or other financial documents to make sure you can make a trade commitment and pay it off as agreed. On the other hand, you cannot face such hardships and other strict requirements when looking for a loan from an institution offering easy personal loans which can be used for business purchases, etc. .

No guarantees

An individual or business owner with a good credit rating or strong credentials with the lender can easily get a loan without putting up any securities or collateral. These loans are called unsecured loans. The majority of financial institutions and lenders generally offer secured loans that can be obtained after signing commercial assets, personal property or other valuables as collateral. Instead, personal loans are generally unsecured loans and have no obligation to put up any property or collateral. This is the reason why a personal loan might be the best option for a small business owner to cover their costs and expenses.

Personal loans come with fewer penalties

Business loans often have strict conditions and penalties, unlike personal loans. You may need to repay a business loan depending on the conditions stated by the lenders. But for the personal loan, the lender will allow you to repay the loan amount with flexible terms and conditions that you can easily adjust according to your budget plan. However, check the loan usage limits, if any, to avoid problems ahead of time.

Disadvantages of Using a Personal Loan for Small Businesses
Loan limits

Loan limits are one of the main drawbacks of personal loans when it comes to using them for small business financing. Individual lenders and financial institutions are not happy to approve loans for huge amounts unless they are offered collateral to secure the loan. This is the reason why, if you need a large sum of money to finance a business, you should not consider personal loans for this purpose, because you cannot get enough money. to meet the needs of your business.

Repayment terms

As mentioned above that personal loans have flexible repayment terms, this could be a disadvantage for business owners if they need a loan of $ 50,000 or more. Because you are not sure of the success and future of your business, you may not have the capacity to repay the loan in the future. This could cause you to lose money to pay off the loan, which can have a negative impact on the borrower’s personal credit rating.

Professional situation, savings and debt capacity … How to convince your banker for a loan?

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In a context of interest rates still very low – 1.12% on average (excluding insurance) in November, according to the Credit Housing / CSA observatory – the real estate market is operating at full speed. But if the banks are inclined to finance the projects of the French, they do not lend wrongly and through.

The selection of candidates for property is made on a case-by-case basis, depending on multiple factors.

What is your personal situation?
When considering your loan application, a banker will start by taking an interest in your lifestyle. If the amount of your income is essential, know that your profession is just as important. An employee on a permanent contract or, better still, a civil servant, will be much more appreciated than an entrepreneur starting a business or a worker chaining precarious contracts. The first concern of lending institutions is to limit the risks of non-repayment of maturities. Therefore, they favor candidates with a good professional situation, in other words those who have both stable and regular income.

On the other hand, bankers do not like high rollers. To put the odds in your favor, you must show that you have a responsible management of your finances. This notably involves a regular savings effort, a limitation of overdrafts and little use of consumer credit. Ideally, it is also preferable to have a good contribution, corresponding to about 10% of the amount borrowed, in order to cover at least the various fees and taxes (commonly called notary fees).

How much can you afford?

The next question is whether your project is well suited to your situation. Clearly: don’t you have the madness of grandeur? To do this, the banker will first determine your debt ratio. It is a question of assessing your borrowing capacity by calculating the difference between the net income of your household and the amount of monthly payments to be reimbursed for the loan requested. If, for the time being, there is no legal ceiling, establishments generally apply a maximum debt ratio of 33%. Because the more a borrower is caught in the throat, the more there is a risk that he will not be able to discharge his debt. However, the High Council for Financial Stability (HCSF) has recently alerted the sector to the fact that, precisely, 28% of the loans currently granted do not comply with this tacit rule, which is however essential.

This ceiling is not an absolute rule, insofar as the borrowing capacity is also assessed in the light of the “remainder to live” which is, this time, framed by law. This amount corresponds to the amount necessary to meet your current expenses: accommodation, food, travel, tuition fees … On the calculation side, you must deduct from your monthly net income all your fixed charges and taxes, as well as the estimated monthly payments of the credit . The amount obtained must not be less than that of the RSA (active solidarity income), i.e. almost 560 euros for a single person. If you have dependents, the amount is increased by 50%.

What should you know about a quick personal loan?

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A personal loan without proof is a fast consumer loan intended to finance a small to medium-sized personal project. This type of credit is without proof, that is to say that the borrower is not obliged to give explanations concerning his loan. It differs from other credit offers by the absence of allocation. A restricted loan is characterized by a specific destination which must be respected, which is not the case for the personal loan. A 24-hour credit without proof can be used for any type of project: financing of studies, payment of medical expenses, travel, etc.


The main advantages of a personal loan without supporting documents are speed and flexibility. Indeed, this offer involves less process, because it is not necessary to provide proof of the proposed project. This flexibility allows the borrower to finance a project discreetly. Flexible, personal credit makes it possible to finance both a car purchase and a trip.


Although the personal loan is the most flexible solution, it is subject to several conditions. The lender must first check the creditworthiness of its client by checking his income, his repayment capacity and his debt ratio. The latter relates to all of the borrower’s expenses, including outstanding loans, rent or even children’s school fees. The totality of these charges must not exceed one third of the borrower’s monthly income if he wishes to benefit from a personal loan. The credit institution must also ensure that the borrower is not subject to a banking ban by consulting the FICP.

Currently, it is possible to apply for credit online. The documents to be prepared are as follows: a copy of his identity document, three last salary statements, bank identity statement and proof of address. Before submitting the request, it is advisable to use an online credit comparison tool to find the most attractive offers.