Why Pay Higher Interest for Small Business Loan vs. Lower Rates on Personal Loans?

In this section we will provide information on both small business loans and personal loans and point out the difference between the two.  This will be beneficial to the small business owner when it comes down to which way to go.   

Small Business Loans

The main benefit for paying higher interest rates for the small business loan vs. paying lower rates on a personal loan is clearly to establish your small business credit and  get away from using your personal credit. 

Beyond that reason, there are a lot of reasons to choose  a small business loan over a personal loan. First of all, a small business loan offers more flexibiltity.  A small business loan allows you to preserve your cash and working capital.  Retention of ownership is important: you retain the current ownership of your company instead of raising funds by selling an interest in your company to an investor.  To optimize your business' cash flow management, small business loans can provide you access to capital with minimal up-front payments and the flexibility to design a loan repayment schedule suitable to your finances.  Small Business Loans also provide a significant tax advantage, since interest payments on your loan are tax deductible. For budgeting purposes, small business loan schedules are fixed at outset, which makes cash management more predictable.

Personal Loans

Obtaining a personal loan may be out of the question for many reasons. Personal secured loans are loans that are offered to individuals rather than businesses.  So, even if you were interested in getting a personal loan there are only certain types you would be able to secure in order to use the funds for your business. 

Unsecured personal loans are not tied to any asset.  With this type of loan you are typically going to pay an extemely high  interest rate and 9 chances out of 10 not be able to secure the amount of financing you require.

Credit Cards are a third option, and should be seen as a last resort.  Despite low, introductory rates that make credit cards seem like a viable option, this type of debt can quickly spiral out of control and cause a powerful, devastating economic ripple effect through a small business.  Multiple credit card users should be especially aware of the policy of "universal default," in which the event of one delinquency with one credit card account will trigger default rates on all of that consumer's other credit card accounts as well.  In effect, one late pay, and your rates will go through the roof on all of your credit card accounts.  As they say: Caveat Emptor, or Buyer Beware. 

Cash Loans

If you are a homeowner, there is always the option of borrowing against the equity in your home.  There are many reasons not to do this:  First of all, a home equity line requires your personal guarantee.  Also, taking out a HELOC  to fund your business will in no way help you establish your business credit.  Instead, it will increase your personal debt and make your house vulnerable to any liabilty created in the business.  Rates on HELOCs start at around 10% (for customers with perfect personal credit), and go up to 25%. Even though this option is convenient and relatively easy to qualify for, please examine all of your options before deciding to tie your largest personal asset to a business that could still fail..

All in all, even though you may be paying a slightly higher interest rate on a business loan, it is worth the security of knowing that the debt is tied to your business, and not to you personally.  Also, you will be one step closer to establishing your business credit.   Please contact us for more information about small business credit, interest rates and small business loans.