CEO of LQD Business Finance, George Souri, weighs in on a recent Forbes Finance Council article discussing matters to consider when funding your business with a personal loan. Take a peek within the article and check out Souri’s insight within the piece.
“Funding Your Business With A Personal Loan? 14 Things To Consider First
Starting a business can be a costly endeavor, but there are many financing options that can help you fund a startup. One popular option for entrepreneurs who don’t want to pursue venture capital or give away equity in the business is taking out a personal loan.
While personal loans can be an easily accessible financing option, you should think long and hard before going through with this or any other funding plan. To help inform your decision, we asked a panel of experts from Forbes Finance Council about the most important considerations an entrepreneur needs to remember before securing a personal loan to fund their business. Here’s what they shared.
1. It’s getting cheaper to run a business.
I would encourage entrepreneurs to remember that the cost of doing business is getting cheaper with every passing year. Additionally, most markets are developed enough to have financiers out there who can support emerging businesses at any stage of growth—if you look hard enough. I believe that bootstrapping a business until you find partners who can help take it to the next level is the best way. – Guan Zhen Tan, Point Hope
2. You should ask a professional if a personal loan is the right path for you.
The most important factor when it comes to loans is to have a solid credit history. But even if you have a perfect credit score, the most important consideration should be to assess your finances with a professional to find out if it’s a good fit for you. Always have a specific repayment plan, and don’t simply take the first offer—compare different loans and get the best interest rate available. – Gabriela Berrospi, Latino Wall Street
3. You need to know exactly what the money will be used for, and why.
Be very specific about what the money will be used for and when you will pay it back. We recently took out a loan to bulk buy software licenses so that we could offer a lower price to our customers, driving higher engagement. We knew that the loan was temporary, and I had a plan in place to get the burden off my back. – Marjorie Adams, Fourlane
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4. You’ll probably have to put up personal collateral.
Many banks and credit facilities require a pledge of all of your personal assets, and this pledge may limit your ability to borrow additional funds as your business grows. Having your personal residence as collateral may add stress to your personal relationship since the bank may also require your spouse’s personal guarantee. If there is a blip in the business it could lead to the loss of your residence. – Joseph Ingrassia, Capstone Capital Group, LLC
5. Make sure you understand and are comfortable with the level of risk.
How is the debt being secured? If you have to put up your house as collateral, make sure you are comfortable with that level of risk and confident in your growth plan. I try to help my clients find the lowest interest rates on loans that require the least amount of personal collateral. This helps them sleep better at night so they can focus on growing their businesses. – Mia Erickson, Whitnell
6. Watch out for predatory lending practices.
Business owners should ensure they are agreeing to fair and transparent terms. Too often, lenders seek to exploit vulnerable small-business owners through predatory practices like excessive interest rates or hidden fees. Business owners should also carefully read the terms of their loans and check if their lender has signed the Small Business Borrowers’ Bill of Rights. – Luz Urrutia, Opportunity Fund
7. You need to budget to cover the loan payments.
Before signing on the dotted line, develop your budget to ensure your business can operate with the added cash outflow of the loan payments—and be realistic. Income is not going to magically increase because of the loan. In reality, expenses may need to be cut to service the debt. This may include reducing your compensation. Once you have faced that reality, you can better decide about the loan. – David Singleton, Seiler, Singleton & Associates, PA
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8. Make sure your family supports the decision.
It is difficult to start a business without any personal investment at all. However, before taking out a personal loan, make sure to discuss it with your family first. If your family is not 100% behind the decision you’re risking a lot more than a financial disaster if things don’t work out as planned. – Christoph Lymbersky, Visionary Founders Capital
9. You may be able to find a hybrid solution.
Funding a business with a personal loan is high-risk. If the business falters, so too could your personal circumstances. Lenders want you to have skin in the game, but find a hybrid solution whereby you are not over-invested. For instance, if you have a current life insurance appraisal, you can leverage that asset toward funding. Do a complete inventory and think creatively about funding alternatives. – Wm. Scott Page, LifeGuide Partners
10. If you sign with partners, you may be responsible for their portion of the debt.
If you sign on the dotted loan with a couple of business partners for a $3 million loan, you might think you’re responsible for just $1 million. But if the loan is “joint and several,” where two or more parties are jointly and separately liable for the full extent of the loan, you’re actually going to be on the hook for the full $3 million if your business partners aren’t able to pay. – Bill Keen, Keen Wealth Advisors
11. If your business fails, you’ll still have to pay off the loan.
The key consideration for taking out a personal loan is the sober reminder that the debt will remain if the business fails. While it is prudent to try and limit personal risk as far as possible, an entrepreneur asking a lender to risk capital should also be willing to stand behind the business. Before taking out a loan, owners need to seriously consider and be willing to take on the risks. – George Souri, LQD Business Finance…”
Read the full article from Forbes here.