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Using Personal Loans Responsibly

Many of the other personal finance bloggers deride personal loans as if they are one of the worst moves you could possibly make with your finances. In some ways they are right, but personally I don’t have quite the same level of disdain that others hold for personal loans. I think that in some instances they can actually make perfect sense.

The best example of a good use of personal loans is for those who are starting a new business. I frequently post about side hustles that you can start while still working a full time job, and while many of these are free to start, at some point you will need to make an investment in your side business if you want to grow. The problem with securing financing for a small business is that without a history of sales and profits you simply cannot get financing.

If you have a great idea you might be able to get startup financing from an angel investor or a venture capital firm, but this comes with a serious downside and for most small businesses should be avoided whenever possible. You see, when you go to venture capitalists and angel investors they want a stake in your business. Ultimately, if your business becomes wildly successful, you could be giving away tens of millions of dollars in value for a pittance.

Banks and credit unions are of no help for a small business startup as they typically want a minimum of 2 years of financial statements, proof of cash flow, and many other financial assurances. As a new business owner you have none of these.

Micro lenders are another source of capital for small businesses, however even these new breed of lenders are looking for a minimum of 1 year of financial success before approving any small business loans.

Even the Small Business Administration requires those seeking government assistance from them to use alternative financial resources, including personal assets, before seeking financial assistance.

Checkbook and chartIn the absence of any friends of family who are willing to lend you the money you need to get your business off the ground and/or growing more rapidly your best source of capital will be through a personal loan.

Now, I don’t agree with people who take personal loans to finance vacations, new Jacuzzis, and other extravagant purchases. In the case of taking a personal loan to help grow or start a new business however you are using the money to create a cash generating asset. In this case I believe the risks associated with personal loans are acceptable considering the potential rewards.

If you are planning on going this route you should definitely do some planning before going out and securing a loan. Determine how much you need for your business, what you will be investing the loan funds in, and what the return on your investment will be realistically. Your return should be sufficient to pay back the personal loan in a reasonable amount of time.

When looking to start a new business you are pretty much on your own and your best option for financing your new startup is going to be a personal loan. You can get more attractive rates versus other personal credit accounts, you don’t put your home at risk as you would with a home equity loan, and you have the benefit of set repayment terms. If you can’t get your business off the ground without a small amount of financing (I would say no more than $25,000), then securing a personal loan might be your best move in the long term.

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