Are Personal Loans a Good Option for Starting a Business?

Can you get a personal loan for a business?

Personal loan funds can be used for just about anything, including debt consolidation, home renovations, medical bills, weddings or vacations, and unexpected emergencies. In most cases, you can also use a personal loan to pay for business expenses, though you’ll want to review the lender’s restrictions before applying. Additionally, you’ll want to carefully weigh the pros and cons of using a personal loan as a business financing option.

How do personal loans for businesses work?

If you use a personal loan for business expenses, you – the business owner – are liable to repay it. The loan will likely show up on your personal credit reports and can impact your personal credit score (depending on how you manage the loan).

The rate and term you receive also depend on your personal creditworthiness, income, debt-to-income ratio, and other factors.

If you’re approved for a personal loan, you’ll receive the funds in a lump-sum payment and you can then use them however you see fit (as long as you follow the lender’s loan usage rules). You’ll then repay the loan in fixed monthly payments over the loan’s term.

Pros and cons of using a personal loan to start a business

Where can you get a personal loan to start your business?

You can get a personal loan through several types of lenders, though it’s important to ensure the lender doesn’t have restrictions around using a personal loan for business purposes. Also keep in mind that interest rates will depend on your creditworthiness, so they can vary. It’s important to shop around and compare offers to find the best one for you.

In general, you can apply for a personal loan with a bank, credit union, or online lender.

1. Banks

Traditional banks, including some large banks and many community banks, offer personal loans, though they typically require higher credit scores to qualify. If you currently bank with an institution that offers personal loans, check with them first to see if you can get a better interest rate due to your relationship with the bank.

2. Credit unions

Credit unions typically offer lower interest rates and better terms than banks due to their not-for-profit status, but you typically must be a member of a credit union in order to apply for a personal loan through one.

Related: Credit union personal loans

3. Online lenders

Online lenders typically have the most flexible loan requirements and offer the lowest interest rates, and most allow you to get prequalified before you can apply. This allows you to get a better idea of interest rates you’d qualify for, as well as loan amounts and terms, and it does not impact your credit score.

How much personal loan can you get for a business?

Most of the time, personal loans range from $1,000 to $100,000, but the amounts vary depending on factors such as the lender and your creditworthiness, income, and other debts. For example, if you have a high debt-to-income ratio or low credit score, you may be limited on how much you can borrow. Alternatively, a low debt-to-income ratio or high credit score may qualify you to borrow more.

If you get prequalified, you’ll be able to see how much of a loan you’d qualify for. Before applying, you’ll want to make sure you qualify for a loan size that fits your needs.

When is it a good idea to start a business using personal loans?

It can be a good idea to use a personal loan for business purposes if:

• You have good personal credit. Only take out a personal loan if you can get lower interest rates and favorable terms, which depends on your creditworthiness, income, and other debts.

• You know you can repay the loan. Because the personal loan is issued to you as an individual, not your business, you are personally liable to repay the loan (even if your business goes under). Not doing so can have a significant impact on your credit.

• You’ve explored other financing options. There are several alternatives for financing a business, and it’s important to look into and compare those prior to applying for a loan. Other options may be better for your needs.

Alternative funding options for a start-up

Additional options for funding your business that you should explore include:

1. SBA loans

Guaranteed by the Small Business Administration (SBA), SBA loans are long-term, low-interest loans that are easier to qualify for than other types of business loans. There are three types of SBA loans:

• SBA 7(a): Used for a variety of purposes including working capital, debt refinancing, marketing and advertising, hiring expenses, tools and equipment, franchises, and new construction.

• DC/504: Strictly used for real estate and equipment purchases.

• SBA microloans: Have a variety of uses but come in smaller amounts, usually less than $50,000.

While SBA loans have a lengthy application process compared to personal loans, their interest rates are typically much lower and you won’t be putting your personal credit on the line.

2. Business line of credit

A business line of credit allows you to borrow money on an as-needed basis, similar to a credit card, rather than taking out a lump-sum loan. A business line of credit has a revolving limit that you can borrow and then repay as you borrow, making them more flexible than personal loans. These can be secured or unsecured, though unsecured lines of credit typically have higher interest rates. You may also have to sign a personal guarantee, meaning you’re personally liable to repay the amount borrowed if your business can’t.

3. Business credit cards

If your business needs are short-term and variable, a business credit card can be a useful way to cover those expenses. These revolving accounts allow you to borrow as needed, and then you repay what you borrow over time. Interest is only charged on balances carried from month to month, but rates are typically higher so these can be costly if you carry a balance.

Oftentimes business credit cards come with additional perks such as additional cards for employees, cash back, rewards, or other bonuses. These cards also stay separate from your personal finances.

4. Equipment financing

Equipment is expensive, and if you’re just starting your business, you may not have the financial means to purchase things like construction vehicles, commercial and manufacturing equipment, and similar needs. Equipment financing is more expensive than buying the equipment because you’ll have to pay interest on what you borrow, but it can give you the capital necessary to purchase what you need to get your business started.

Note that equipment financing is typically secured by the equipment you purchase, so if you fail to repay the loan, you’ll lose the equipment.

5. Working capital loans

These are best for a business that’s established and has a record of their assets and liabilities, and are designed to hold your business over during a lull. They allow you to borrow from your working capital, which is your current assets minus your current liabilities, and you can keep operating during times of reduced business activity. You’ll then repay the loan when your business is back up and running at its prime.

These loans have fast funding time frames, so they can be helpful if you need cash fast to help keep your business above water for the short-term.

6. Crowdfunding

Websites like Kickstarter and GoFundMe give businesses the opportunity to raise funds from the general public. This option can be a particular draw because it’s not a loan that needs repaid. Instead, you get to keep all of the funds raised and use them how you please without having to pay them back and without interest.

However, there’s no guarantee a crowdfunding campaign will be successful and you’ll raise the capital you need. Plus, you may have to pay taxes or owe fees for the money you receive. Operating a crowdfunding campaign takes more work than applying for a loan, but they are typically a cheaper option.

7. Non-profit microloans

Microlending platforms offer small loans with low or even 0% interest, but you must get people in your community (like friends and family) to fund a small portion of the loan. These specialized business loans are available through nonprofit, community-based organizations and are typically designed to provide funding to women, low-income, veteran, and minority entrepreneurs and small business owners who have difficulty getting capita through traditional means.

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