When starting a business, it can feel like there are a million and one things to do. Most business owners are focused on the product or service they are providing to the world, but there are financial concerns around almost every corner.
One of the most crucial aspects of running a business is having access to affordable financing. In some cases, it may make sense to turn to personal loans as an alternative funding solution. Before you do, here’s what you need to know about the differences between personal loans and business loans, what you need to qualify, and the potential lenders you might consider as a business owner.
On this page:
- Can You Use Personal Loans for Business Funding?
- Best Personal Loans for Business Expenses
- Benefits of Using Personal Loans for Business
- Downsides of Using Personal Loans for Business
Can You Use Personal Loans for Business Funding?
Personal loans are generally unsecured loans lent to an individual without evaluating the state of the company itself. Instead of asking for a business plan or annual revenue history, the loan application for a personal loan asks for details on the borrower’s personal credit history, income, and assets. You can use a personal loan for just about any purpose, but you should double-check with your lender of choice to make sure you can use your loan for business funding.
Remember that if you use a personal loan for business needs, you are responsible for repayment as an individual. Essentially, it’s your credit — and in some cases, your personal assets — on the hook if the business fails. If you’d rather not risk your own assets, try to find a business loan with no personal guarantee.
Best Personal Loans That Can Be Used for Business Expenses
In addition to traditional banks, credit unions, and other financial institutions, you can typically find personal loans that can be used for business through online lenders, which often offer a quick application process, fast funding, and flexible repayment terms. Here are a few personal loan lenders small business owners should consider.
LoanMe offers both small business loans and personal loans, the latter of which can be used for business needs. LoanMe personal loans have higher interest rates and lower maximum loan amounts than its small business loans but can still be a good option if your personal credit qualifies you for a lower rate. Beware of high origination fees that can seriously cut into your loan proceeds.
- APR Range: 9.90% to 184.36%
- Loan Terms: 180 months for prime borrowers who own their own home; for subprime borrowers, repayment periods start at 47 months
- Loan Amounts: $2,600 to $100,000
SoFi is a leading online lender offering personal loans with fixed interest rates to qualified borrowers with strong credit scores. One especially cool feature of a SoFi personal loan is the unemployment protection program, which lets borrowers temporarily halt their monthly payments if they lose their job or income source. In the unfortunate event your business doesn’t work out, this perk could come in handy.
- APR Range: 5.99% to 16.24% with autopay
- Loan Terms: Two to seven years
- Loan Amounts: $5,000 to $100,000
Citizens Bank offers personal loans with no origination or prepayment fees, no collateral, and quick access to funds (usually within two business days). Borrowers can complete an application online or in person at a branch location, and the loans come with fixed interest rates and repayment periods. In order to qualify, applicants should have good credit and income sufficient enough to repay the loan.
- APR Range: 6.80% to 20.91% fixed rates
- Loan Terms: Three to seven years
- Loan Amounts: $5,000 to $50,000
Marcus by Goldman Sachs
Marcus by Goldman Sachs is a newer addition to online lenders offering personal loans for businesses. The lender has an easy-to-use online platform for submitting applications and supporting documents, and there are no origination or application fees. Borrowers with lower credit scores may still be able to qualify, although the interest rate charged will be higher than those with good credit.
- APR Range: 5.99% to 28.99%
- Loan Terms: Three to six years
- Loan Amounts: $3,500 to $40,000
Benefits of Using Personal Loans for Business
Using personal loans for business financing needs offers certain benefits over traditional business loans.
It’s Easier to Qualify
Most traditional business loan lenders want to see a history of steady revenue cash flow when evaluating your application, so if your business is brand-new and not yet profitable, you might not be able to qualify. Personal loans, however, have a lower barrier to entry — if you have good personal credit, chances are you can get approved and use the funds to get your business off the ground.
You May Get a Better Rate
Personal loans may be more affordable than other financing options, such as credit cards or lines of credit. This is because interest rates for personal loans are usually much lower — for well-qualified borrowers, they can be in the single digits, whereas credit cards often have double-digit interest rates. For example, you might be able to find a personal loan with a fixed interest rate as low as 5.99%, but average credit card APRs are currently 17.71%.
Use the Money How You Want
Because a personal loan is in your name as the borrower, you are not restricted in how the funds can be used, so long as your lender doesn’t explicitly prevent you from using the loan for business purposes. You can even use personal loans for business for both company and personal needs, but be sure to document what’s a business expense and what isn’t.
Downsides of Using Personal Loans for Business
Although there are plenty of benefits in using personal loans for business needs, there are also some downsides to consider.
Your Credit (and Wealth) Is on the Line
Lenders offering personal loans for businesses look at your financial track record to determine if you can qualify for funding. This means your business does not have to qualify based on revenue or profits. However, should the business fail and you become unable to repay the loan, your credit and personal finances may suffer. It will be harder for you to qualify for credit in the future, and if you used collateral to secure the loan, you risk losing those assets if you default.
The Loans Aren’t as Big
Loan limits for personal loans are generally much lower than conventional business loans. Most lenders offer personal loans between up to $50,000, with some going up to $100,000. However, startup businesses may need far more funding to successfully get off the ground. If you can’t yet qualify for a business loan, you may need to look for outside investors until you can.
Not Great for Short-Term Financing
Personal loans for business are not often a great solution for short-term financing needs, especially if the lender charges prepayment penalties if the loan is paid in full before the term is up. If you need funds for a one-off expense, consider a business credit card. Be wary of taking on credit card debt for an extended period at regular rates, though.
It Doesn’t Help Your Business Credit Score
All businesses have credit scores, just like individual consumers do. Getting a personal loan under your name may help increase your personal credit score over time, but a traditional business loan helps your business credit score by showing a track record of responsible debt management.
Building business credit can also help you secure additional funding in the future. However, a personal loan for business may be your only option if you have yet to establish business credit.
You Lose Out on Tax Benefits
Although proceeds from a personal loan are not taxable on either the personal or business side, using a personal loan for business finances means you miss the opportunity to qualify for tax breaks by writing off the interest as a business expense, provided the business and loan meet certain IRS qualifications. Personal loans do not qualify for this deduction.
How to Secure a Personal Loan for Your Startup or Business
If you’re considering a personal loan for your new business, the good news is the process is relatively simple. Applications can often be completed online, and you’ll need to provide information regarding your income, residency, Social Security number, and date of birth. Some lenders may require you to provide additional documentation, such as paystubs, tax returns for income verification, and bank and investment account statements.
In many cases, your application can be approved in as little as one business day, with funding taking place quickly after that. Once your business loan is in place, be sure to have a plan for repayment so you don’t put your personal assets on the line.
Author: Melissa Horton
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