Should small business owners take out personal loans during coronavirus?

A personal loan can provide working capital to businesses during a financial crisis. (iStock)

The coronavirus pandemic has affected the financial health of everyday Americans and small business owners alike. In a poll conducted by the U.S. Chamber of Commerce and MetLife, 47 percent of small business owners said that receiving federal funding through the Paycheck Protection Program was critical to their survival.

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A personal loan can provide an alternative source of working capital for businesses that aren't able to secure a disaster small business loan during COVID-19 or at any time when cash flow is tight. There are pros and cons to using personal loans in place of a small business loan.

Should you get a personal loan for your small business during coronavirus?

Personal loans are typically designed to be used for personal expenses, such as home improvements or consolidating credit card debt. But in a financial emergency, a personal loan could also be used to cover small business expenses.

EVERYTHING YOU NEED TO KNOW ABOUT PERSONAL LOANS

If your business remained open during coronavirus, for example, but operated at reduced hours then a personal loan could help fill the gap in meeting payroll, making your monthly rent or lease payments or covering utilities. You could also use a personal loan to cover tax obligations or rent payments if your business closed temporarily because of COVID-19, or manage your personal expenses such as mortgage payments.

Personal loan pros:

  • It may be easier to qualify for compared to small business loans.
  • Unsecured personal loans don't require you to offer business or personal assets as collateral.
  • Monthly repayment makes budgeting easier. 
  • Personal loan funds can be used to cover a variety of business or personal expenses. 
  • Loan application, approval, and funding can be quick when using an online lender. 

Personal loan cons:

  • Borrowing limits may be lower than what you might find with a small business loan. 
  • Unlike business loan interest, personal loan interest isn't deductible as a business expense.
  • Defaulting on a personal loan could damage your personal credit score. 

Current personal loan interest rates are relatively low, thanks to the Federal Reserve's decision to cut interest rates in response to the economic impacts of coronavirus. Lower interest rates mean more money saved on interest charges when borrowing. If you're interested in comparing rates for personal loans, Credible can help. You can easily get prequalified for personal loans and compare rates in minutes, with no hard credit check required.

CAN YOU GET A PERSONAL LOAN WITHOUT A CREDIT CHECK?

How to get a personal loan fast

Getting a personal loan for your small business starts with shopping around for lenders to find the best rates. Again, that's where Credible can help.

Once you've chosen a lender you'll need to complete the loan application. Generally, this involves giving the lender your:

  • Name
  • Address
  • Phone number and email
  • Social security number
  • Date of birth
  • Annual income
  • Requested loan amount
  • Purpose for the loan
  • Monthly mortgage or rent payment

Applying for a personal loan can be much simpler than applying for a business loan. Filling out an SBA loan application, for example, can be a lengthy process.

HOW TO RAISE YOUR CREDIT SCORE WITH YOUR FAMILY'S HELP

You can expect a hard credit check at some point during the application process. Personal loan lenders use your credit score and credit history, along with other factors, to decide how much to approve you for and what interest rate you'll pay. Checking your credit before applying for a personal loan can give you an idea of what kind of loan terms you might qualify for.

What about PPP and other federal loans?

The federal CARES Act includes several provisions aimed at helping small business owners financially, including the Paycheck Protection Program (PPP) and disaster small business loans. PPP loans are designed to help small business owners keep employees on the job while disaster loans offer emergency funding for businesses affected by COVID-19.

According to the U.S. Treasury Department, 4.3 million PPP loans had been approved through May 16, 2020. The majority of loans went to businesses with less than $10 billion in assets and the average loan amount was $118,000. While approval rates for the program were disproportionate to applications initially, the National Federation of Independent Business reports that among its members, 80 percent had applied for a PPP loan and almost 90 percent of those business owners had received funding through the program.

CALCULATE YOUR DEBT-TO-INCOME RATIO AND FIND OUT WHERE YOU STAND

If you haven't yet applied for a PPP loan or other COVID small business loan under the CARES Act, doing so could be a good option. Up to 100 percent of the loan can be forgiven if you meet certain criteria, including using the funds to meet payroll, pay mortgage interest, cover rent or pay utilities. You'll need to document how you used the money carefully and if you don't qualify for forgiveness, the loan is fully repayable with interest.

Tips for struggling small business owners 

As states begin reopening, you may be wondering what your new normal will look like financially. These tips can help with managing your finances as you get back to business.

HOW TO GET A PERSONAL LOAN WITH NO JOB

Reviewing your budget can help you get a better understanding of what your expenses may be going forward and where you can streamline costs. If you have small business credit card debt, it may be worthwhile to discuss options with your card issuer for temporarily reducing your payments or interest rate to make the balances more manageable. On the personal side, you may also consider options like student loan forbearance, mortgage forbearance or refinancing to make those loans more affordable until your business income rebounds.