How Much Personal Debt Should You Accept For Your Startup Business?
Many small businesses experience a shortage of money especially during early stages of development. If your startup is currently in a tight financial situation, you are not alone. In fact, it is a normal part of the growth curve. Personal debt financing has always been an option for many entrepreneurs. This is regardless of whether their business is just about to start or is already running. It allows new startups to sort a number of business aspects, including paying for equipment and buildings.
Have you identified an opportunity and developed a good business plan with aggressive growth strategy but no money? Is your small business stuck and is desperately in need of extra cash? The low-interest personal debt would be an ideal solution.
Personal debt is that owed for which you are legally responsible. It involves borrowing money from a lender with the promise to pay back after a given period. Of course, you have to repay with an interest.
The amount of personal debt to accept for your startup varies with the business needs. However, it is wise to borrow that which you are able to repay without straining your resources or lifestyle. Ideally, personal debt is an excellent option when you are considering a small amount. For millions or hundreds of thousands, equity financing would be a better choice.
Sources Of Personal Debt Financing
As the owner of a startup business, you have a wide range of places where you can commit yourself in order to get a personal loan. Here are some of the most common options to choose from:
Family, friends, and relatives
You can always take a loan from friends and relatives to finance your business. However, it is important to have a formal agreement on repayment terms. This should cover interest rate, duration, and possible penalties. Such loans are friendly and comparatively cheaper.
Banks and credit unions
Based on your credit record, banks and credit unions will be able to give you a personal loan. Unlike relatives, these institutions will require that you provide a collateral. In addition, they give loans under fixed terms and conditions, including fixed interest rate and payment duration. Typically, you will be required to submit monthly payments which include a fraction of the principal amount plus interest.
Finance companies are the perfect alternative for entrepreneurs with poor credit ratings. Like the banks, they require individuals to list a specific asset as collateral. However, finance companies charge relatively higher interest rates than credit unions and banks.
Benefits Of Debt Financing
Even though personal debt puts financial assets of your family at risk, it presents huge benefits over other financing options. Unlike equity financing, personal debt financing gives you full control over your small business. In fact, the relationship between you and the lender terminates automatically once you complete repaying the loan. The interest rate charged on your loan is tax-deductible and the repayment schedule does not fluctuate.
Taking a personal loan remains of one of the best choices to get your business started. However, you have to limit the amount to within your range. That way, both you and your small company get to benefit. As an entrepreneur, you need to remind yourself that no risk, no reward.
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