Personal loans are usually offered by banks, credit unions or online lenders. They are paid back in agreed installments, often monthly, with fixed payments typically made over the course of several years. They can be used for a number of purposes, including funding a business.
Funding your business with a personal loan is perfectly legitimate, and can have its advantages. Business loans eliminate personal liability and make it possible to start building your company’s financial reputation. Yet they can be difficult to obtain if your business is not yet well-established.
You can get a personal loan up to $50,000 depending on your circumstances. Though they are generally less difficult to secure than a business loan, personal loans can still be rejected for a number of reasons. Recent data suggests that 76 percent of those who apply for one are rejected.
Bad credit score
One of the main reasons for personal loan applications being rejected has to do with credit ratings. If you have a bad credit score, or even a lack of credit history, lenders may not want to take the risk. They will offer you less favorable interest rates and terms, or will simply reject your application.
Securing a personal loan can require a credit score in the 700s. There are ways to increase this rating over time, by keeping up with repayments and not defaulting on any loans. Alternatively, it is still possible to secure a loan with bad credit. These bad credit loans take into account your current situation more than your previous track history.
Income and outgoings
The second reason why personal loans are rejected is insufficient income. Lenders will look at bank statements and wage slips to determine how much income you have. They may have a minimum income threshold. Income is compared with expenses to gauge whether you are able to make the monthly repayments for the loan.
Your existing debt will be taken into account too. If you have a lot of outstanding debts then this will weigh against your income. If you have applied for too many loans, or it has been too soon since your last loan or application, then this too can be reason for rejection.
Purpose of a loan
The purpose of a loan is of interest to the lender. They will want to see that the money is being used for a legitimate purpose, and may have restrictions on what you can borrow money for. For example, gambling is usually off the cards, as is using the loan to make a deposit on another loan, and recently some personal loan companies have discouraged using the lend for crypto investment.
You have to be truthful about what you are using the loan for. If it’s for business, then lay out your business plan. If it’s solid, then it will likely work in your favor. Lying about the purpose of your loan is considered a fraud.
Always make financial decisions wisely. Examine your own situation and make sure that you can afford repayments. Consider other ways to raise capital such as crowdfunding. Personal loans can be a great way to fund your business, but remember that they come with personal liability, so be careful. Make sure your application is always filled in correctly, as not doing so can lead to delays or rejection.
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