Starting or expanding a business often begins with a dream and, inevitably, a cost. Therefore, it is by no surprise that among the various reasons cited in personal loan applications received by Nedbank, a notable number of applicants indicate that the money is intended for business purposes. This raises an important question: When is it appropriate or advisable to use a personal loan to finance business ambitions?
‘Like every important business decision, this one requires strategic thinking,’ says Wendy Beaumont, Executive for Unsecured Lending at Nedbank. ‘While a personal loan can be a quicker and more accessible source of funding than other forms of accessing capital in the market, there are a few critical factors to consider before committing to short- or long-term debt. ‘
A steady income is a good start
Beaumont explains that if you have a steady income and manageable personal debt, a personal loan can be a reliable way to kick-start your business ambitions without needing collateral or an extensive trading history. In fact, this approach is well-suited to people looking to diversify their income streams or build or expand a business that has a clear business case and strong potential for growth.
She emphasises: ‘The ideal scenario is when your current income is stable enough to comfortably pay the loan instalments even before your business starts turning a profit. This provides a financial buffer that allows the business time to take off, while protecting your personal finances from undue strain.’
However, Beaumont warns that if your business is still in the ‘idea’ stage or you haven’t tested the market, borrowing personally to fund it is extremely risky. You’ll still owe the loan whether the business succeeds or fails.
‘Secondly, if you already have personal debt, adding another monthly obligation to your personal finances, especially for something with no guaranteed return, can affect your credit score, increase your stress, and put strain on your household finances,’ she adds.
Another point is that if your business requires significant upfront investment, personal loans usually fall short. Taking a large personal loan could jeopardise your financial future if the business doesn’t succeed.
Consider risk-managed alternatives
Before committing to a personal loan, explore other funding options to complement or reduce the size of your loan, such as savings, reinvested profits, or contributions from family and friends. You could also apply for business grants or enterprise supplier development support offered by various government and private sector organisations. These alternatives can help you manage risk while still moving your business forward.
When it’s thumbs up for a personal loan
According to Beaumont, the best time to take a personal loan is when you have a proven business model, realistic financial projections, and a strong personal financial foundation.
‘Personal loans are best suited for modest capital needs to cover early operational expenses or business-critical investments,’ she explains. ‘They’re accessible to people with a good credit record and steady income, making them ideal for first-time entrepreneurs or those expanding on the side.’
Responsible borrowing is key
While personal loans offer flexibility, Beaumont cautions that responsible borrowing is key. Avoid mixing personal and business expenses, underestimating costs, or overlooking the loan term. Keep your business and personal finances separate – this makes it easier to track progress and stay on top of both commitments.
Entrepreneurs tend to be optimistic, Beaumont notes, but failing to build a conservative budget with contingencies can mean your repayments start before your business reports profit. Business owners must also understand the full cost of borrowing, as personal loans come with origination fees, early repayment penalties, and high interest rates due to their unsecured nature.
Fund a plan and not a dream
Taking a personal loan to start a business isn’t inherently bad, but it’s not a decision to take lightly. It should be made with full awareness of the risks and a clear plan for repayment. Ultimately, taking a personal loan for a business is not about funding a dream; it’s about funding a plan.
