As India’s economy and startup ecosystem continues to flourish and grow, several aspiring entrepreneurs are exploring financing opportunities to kickstart with their own ventures.
One of the most prominent options to meet these demands is utilising personal loans to fund business ventures and initiatives.
Now, this approach offers several advantages still, it also comes with its set of challenges that potential borrowers should be clearly aware of. This write-up is dedicated towards discussing these concepts in detail.
Personal loans: A risky yet flexible funding source
Personal loans are loans that do not need collateral. They are generally unsecured and are used for several distinct purposes such as education, medical expenses, repayment of other high interest rate loans, they can also be used for home renovation and new business ventures including business funding.
This flexibility makes these personal loans extremely attractive as an option for entrepreneurs who may not be eligible for traditional business loans.
For example, personal loan interest rates generally range between 10.5% to 16% per annum in April 2025. The State Bank of India personal loans start from 11.50% whereas HDFC Bank offers rates starting from 10.50% and Kotak Bank interest rates begin from 10.99%.
Now the clearance of an applicant’s personal loan application depends on several factors such as: his creditworthiness, credit profile, repayment history, level of credit score, consistency of earning etc.
What are the implications for personal credit and financial prosperity?
The borrower becomes personally liable to make timely payments in cases where he uses a personal loan for business expansion and growth. Once the loan is applied for, granted and used by the borrower he becomes liable for complete repayment as per the contract of the loan irrespective of the business’s success or failure.
This can have serious consequences for one’s peace of mind, emotional prosperity, financial stability and credit score. Do note, defaulting on such loans can adversely impact the borrowers creditworthiness, thus making it even more difficult to secure financial support in the future.
What are some alternative financing opportunities for startups?
There are several different financing opportunities available for startups and small businesses that can be explored by entrepreneurs. The government of India provides for various schemes, such as MUDRA loans and credit guarantee schemes for MSMEs. These schemes provide financial assistance with easier and more favourable terms.
On similar lines, Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) provides for collateral free credit to MSMEs. This is done by offering credit guarantees to lenders. These ideas and programs are designed to foster entrepreneurship and can be a more prudent option for funding business ventures and emerging business ideas.
What are some key considerations before borrowing?
You should keep in mind the following important considerations before going ahead with your personal loan applications for funding businesses:
- Write down and understand the loan amount needed: Take notes, think and decide on the amount you need. Personal loans are generally meaningful for funding smaller and easily repayable funding needs.
- Clearly discuss and understand the repayment terms: Do ensure that your repayment plans align with the profit growth and cash flow projections of your business venture. So that you don’t face any cash crunch in meeting your personal loan repayment EMIs.
- Check and evaluate fees and interest rates: Carefully check and compare interest rate offers from multiple lenders to secure the most favourable terms. Also read about the integrity of the lender and their loan recovery process in-case if things don’t go as per plan with your loan repayment.
- Reach out to financial advisors and professionals: Seek professional guidance to clear doubts and to understand the implications of taking a personal loan for business ventures. It is important to also have a professional interaction with a certified financial planner to help you get the most out of your loan.
Hence, given that personal loans can provide quick access to funds for initiating a business venture or idea, still, it is important to carefully consider the pros and cons, explore all options, consult financial advisors and experts for guidance and take a decision only post the same. These are some of the crucial considerations all entrepreneurs must keep in mind to ensure the long term success of their businesses.
Disclaimer: Mint has a tie-up with fintechs for providing credit; you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit scores. Mint does not promote or encourage taking credit as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.
