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Starting a small business is not an easy task. It takes a lot of time, patience, planning and often more money than you think. Fortunately, there are potential financial options for small business owners. The two most common are small business loans and private loans. And while they may seem to be the same in practice, there are some very important reasons why they want to choose one over the other.

Borrowing a personal loan (and may not be) to start your own small business (talk to financier Ashley Rousseau).

What is a personal loan?

Private loans are typically a line of credit for large purchases. As the name implies, it is a lot, a personal loan Private, Which can be used to cover the cost of anything that is necessary for your personal situation. This could be house repairs, weddings, funeral expenses, travel expenses, emergency expenses, and more.

There are really no hard and fast rules about how a loan should be used (although you often have to explain your plans to use the money when you apply for a loan). You can even use it to pay off a lot of credit card debt – in this way, you can ‘consolidate’ your credit card debt into a personal loan.

Private loans have very low interest rates compared to credit cards. For reference, the current average APR for two-year private loans is 9.58% and the average APR for credit cards is 16.30%, according to the Federal Reserve.

Usually, the interest rate you pay depends on your credit score. And although different lenders have different minimum credit requirements for approval, your credit score is more likely to be higher, lower interest rates, and more suitable loan terms.

Another important difference is that private loans often have a fixed term. This can last from a few months to a few years. And depending on the lender, you may have to repay the loan in advance, Before the expiration date. Some lenders also charge a down payment, but if you want to avoid this you can only apply for one loan such as Discover Personal Loan.

To get a better idea of ​​what other private loans are out there, you may want to browse the list of the best private loans.

Get personal loans

Information about Discover Private Loans is collected independently by CNBC and has not been reviewed or disclosed by the Bank prior to publication. Discover Bank USA is a member of FDIC.

  • Annual Percentage Rate (APR)

  • The purpose of the loan

    Debt consolidation, home improvement, wedding or vacation

  • Loan rates

  • Terms

  • Credit required

  • Startup fee

  • Prepayment penalty

  • Delayed payment

What is a small business loan?

Small business loans are similar to private loans, but they are designed to help entrepreneurs get financial support for the various costs of managing their business. Some of these loans can be applied for through the US Small Business Administration (SBA), however, you can also apply for microfinance loans from commercial banks, community banks, peer lenders such as the Financial Assistance Club and Cabby. .

There are also a few types of business loans. A small business loan line gives you a certain amount of credit that you can take out and receive in cash, and you pay interest on the borrower (just like you do with a credit card). And work capital loans are meant to help you cover the day-to-day costs of running your business – such as wages and rent for your office or workplace. There are only two types of loans to consider, but there are other types of loans that may be more suitable for your needs.

Can I use a personal loan to pay for small business expenses?

The short answer is yes, personal loans can also be used to cover the costs associated with starting a small business.

“Once approved for a personal loan, you can use it in any reasonable way,” says Ashley Rousseau, a financial planner and educator. “If you start a small business, you can use your personal loan to cover everything from loans to salaries. But you may want to do it at the lowest possible cost for you, which means taking your loan as low as possible. interest rate.”

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When would it be reasonable to use a private loan for a small business?

So now you have two great options for financing your small business. But there are a few things to consider when considering which type of loan is best for you.

When applying for a small business loan, keep in mind that some lenders may ask you for a few business documents before you are approved.

“Some banks may ask you for tax returns or receipts for your business or ask you to come up with a business plan,” said Rousseau. With private loans, you do not have to show any business interest to get a loan approved.

But before applying for a personal loan, you should make sure that the lender has no restrictions when using the money for business purposes. If the terms of use for a private loan are unclear, you need to be honest about your intentions as a borrower and make sure the lender knows you can use the money for your business.

You can easily ask the lender if you can use the personal loan for business purposes. It is best to be aware of your goals in advance to ensure you do not violate any loan terms: Using a loan for prohibited purposes may force the lender to repay the full amount and interest immediately.

In addition, if you do not have any guarantees for securing your business loan, you can opt for an unsecured private loan. A secure loan means that if you are unable to pay your debts, the lender may keep the property you offered as collateral (your car, your home or your small business may be your stock). Some small business lenders ask you to secure the loan, but private loans are usually unsecured.

Another factor to consider is how much money you plan to borrow. Most SBA loans allow you to borrow up to $ 5 million in business expenses. Most private lenders offer up to $ 100,000.

When is it reasonable to apply for a small business loan?

Restrictions on the amount allowed for each loan are a very important consideration. If you think you need more than $ 100,000 to get started, you may want to apply for an SBA loan because they are too expensive. Creating a business plan and budget will help you identify your real needs.

Also, remember that private loans are linked to your personal credit history. So if you fall behind on payments, your personal credit score may suffer, and that can make it harder for you to get approved for other credit lines such as a new credit card, car loan or mortgage.

at last

Both personal loans and small business loans are effective ways to cover the costs of getting your small business off the ground. Where you can get the lowest interest rate and whether or not you want to keep your personal credit online, your choice may depend on how much money you really need.

If you are applying for a personal loan, make sure you read the terms of the loan in advance to make sure the loan is being used for business purposes. If it is not clear, you should ask the lender directly. Also, make sure you take some time to develop a business plan and budget that will help you explain your needs.

“It is difficult to know where they are going if they do not know where they are going,” said Rousseau. When creating your business plan, know what to expect for your income and how to repay the loan before you apply.

Editorial Note: The comments, analyzes, reviews or recommendations described in this article are for editorial staff only and are not reviewed, endorsed or otherwise approved by any third party.